Can I withdraw money from my pension?

Pensions serve as a fundamental element of retirement planning, providing you with a source of financial security during retirement. Yet, navigating the evolving pension landscape, with ever-changing rules and regulations, alongside the array of retirement options available, can be daunting.

Questions inevitably arise such as “when can I access my pension?” and “what are my retirement options?”. Here we aim to address these questions, providing some clarity on how and when you can withdraw from your pension.

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How to withdraw money from your pension

In the UK, there are generally two types of pensions that can be set up: defined benefit and defined contribution pensions. 

• Defined benefit pensions (also known as a final salary scheme, but also include public sector schemes for example, Career Average Revalued Earnings or CARE) guarantee a fixed income in retirement determined by salary and length of service, with a degree of inflation protection built in. 
• Defined contribution pensions build a fund through contributions from you, your employer, or both, with your retirement income dependent on the pot’s growth. Defined contribution schemes can be workplace or personal pensions and typically provide more flexibility with retirement options. 

It is therefore important to understand the different options available to you.

Since the enactment of pension freedoms legislation (‘pension reforms’) in April 2015, accessing and managing your pensions has become more flexible. You can now access your defined contribution pension from the age of 55 (increasing to age 57 in 2028) with access to a wider range of options. While this flexibility is advantageous, it is important to understand the implications of each option and how any decision will impact your future. 

What are my retirement options? 

1. Lump sum withdrawal(s) - Otherwise known as uncrystallised funds pension lump sum (UFPLS), this option allows you to either withdraw your entire pension as a cash lump sum all at once, or in stages (dependent on what your provider offers). The initial 25% will typically be tax-free (up to the standard lump sum allowance of £268,275), and the remainder subject to income tax. For larger pots, this could create a significant income tax liability. This approach provides flexibility by allowing you access to your funds when needed, while also maintaining investment possibilities and phasing your tax-free cash over the years. It is important to note that if you opt to cash in your pension entirely, you could miss out on future investment growth opportunities and face potential financial shortfall in later years.
2. Purchase an annuity – An annuity provides a guaranteed income for life, allowing you to convert your pension pot into a reliable stream of payments over a lifetime or a predetermined period. You can opt to receive up to 25% of your funds tax-free upfront, with the remaining funds being used to purchase the annuity where the income you receive is taxable. You have the freedom to buy an annuity from any provider, not necessarily the one your funds are held with, although some may require a minimum investment. It is possible to build in annual annuity increases or protection for a spouse or other beneficiary, however, this reduces the starting level of income. It is worth noting though that once you purchase an annuity, the decision is irreversible, and you cannot change your mind and switch to another plan or provider.
3. Pension drawdown – This option offers the greatest flexibility, allowing you to withdraw a tax-free lump sum of up to 25%, followed by regular taxable income, while keeping the remaining funds invested. You have the freedom to manage your investments and withdraw funds according to your needs and income tax position. Not all pension schemes or providers offer drawdown, so you may need to move to a different provider to facilitate this.
4.  Keep your pension pot as it is – Lastly, you do have the option to take nothing at all and keep your pension pot where it is which allows for continued investment growth. However, fluctuations in market performance can lead to your fund decreasing in value as well as going up. In all cases, it is also important to check the death benefits position on your current arrangements to ensure they are tax-efficient for your beneficiaries.

When can I access my pension?

The minimum pension age for accessing pension pots typically stands at 55 years. However, this is increasing to 57 from 6 April 2028, aligning with the planned increment in the minimum State Pension Age to 67 between 2026 and 2028.

Can I withdraw from my pension early?

Early withdrawal from your pension, typically before the age of 55, is primarily contingent upon your health status. If you are required to retire early due to illness, you may qualify for access to your pension pot before reaching the minimum age threshold. Eligibility varies from provider to provider, but usually applies when your health prevents you from continuing employment and earning income. Withdrawing funds before age 55 and without any qualifying circumstances incurs substantial tax charges.

Summary

As evident, there are various options available for withdrawing money from your pension, but it is essential to consider the implications of each option. Seeking advice from a financial adviser who can provide tailored advice based on your individual circumstances is therefore recommended.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

A pension is a long-term investment. The value of an investment and the income from it could go down as well as up.  The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

The information in this article is based on current laws and regulations which are subject to change as at future legislations.