Pension withdrawals: limits and rules

If you are 55 or over and have a defined contribution pension, you can start taking money out. If your situation is different, other rules may apply.

Ruth Jackson-Kirby Published on 01 February 2021. Last updated on 22 March 2021.
Pension withdrawals: limits and rules

Thanks to the introduction of new rules in April 2015, savers now have far more control over how they spend their pensions. You don’t simply have to buy an annuity with your pension — you can withdraw lump sums or take a regular income, too.

Read on for what you need to know about making pension withdrawals.

When can I withdraw from my pension?

If you are 55 or over and have a defined contribution pension, you can start taking money out. (The age rises to 57 in 2028.) You may be able to access your pension savings before you are 55 if you are in ill health or have a protected retirement age.

Although you can access your money from age 55, that doesn’t necessarily mean you should. Unless you have an urgent need for the money, it is usually best to leave it until you’ve retired. Leaving it invested will allow it to carry on growing and will reduce the number of years you’ll need to make it last.

If you have a defined benefit pension you probably have a retirement age of 65. This is usually when your pension starts being paid. You may be able to take a reduced income from the age of 55, but this will depend on the rules for your pension. Check with your scheme to find out the retirement age and early access rules for your pension.

How much can I withdraw from my pension?

If you have a defined contribution pension, when you turn 55 you can take as much as you like from your pension. You can cash the whole lot in, or take regular income or ad hoc lump sums.

The first 25% of your pension can be taken tax free. This is often taken as a one-off lump sum, but can also be done in smaller withdrawals. The remaining 75% will be subject to income tax.

Depending on the size of your withdrawal, this could add up to a sizable tax bill, particularly if it boosts your income for that year to such an extent that it pushes you into a higher-rate tax bracket.

If you are cashing in a whole pension, you also need to think very carefully about how you will use that money to fund your retirement, particularly if that’s your only pension.

Although you may like the idea of getting your hands on your money, it may make more sense to leave your pension invested, particularly if your only plan for it is to sit in a savings account paying paltry rates of interest.

​​» MORE: Pension planning tips to maximise your savings

What is the emergency tax on a pension withdrawal?

It’s important to be aware that the first time you make a taxable withdrawal from a defined contribution pension, you are likely to be charged emergency tax. This is because, unless you have an up-to-date tax code or P45, your pension provider won’t know the correct amount to deduct.

Although you will have to pay much more tax on your withdrawal than you would have anticipated, you can claim the overpayment back from HMRC. After clarifying your position it will then issue you a new tax code.

Can I access my defined contribution pension early?

You own the money in your pension, and there is no law to stop you withdrawing money from it before you turn 55. However, you will pay substantial fees if you access your pension early unless you meet specific criteria.

You can access your pension early if:

  • You are in poor health.
  • You have a serious medical condition.
  • You have been given less than a year to live. (In this instance you could be able to take your entire pension as a tax-free lump sum.)

If you don’t meet the above criteria and you withdraw money from your pension, HMRC could charge you up to 55% tax on what you withdraw. Because of the hefty tax charge on early pension withdrawals, most reputable pension companies will strongly discourage you.

However, there are plenty of dodgy pension companies that will say they can help you access your pension early. The problem is they will charge a hefty fee of up to 30%. Combine that with HMRC’s tax charge and you could end up with just 15% of your pension.

» MORE: How much will my retirement income be?

What should I do with my pension?

You can access your defined contribution pension at any time from age 55, and unlike members of defined benefit schemes it’s down to you to turn it into a retirement income. There are a number of options for accessing your pension, and which route is right for you will depend on your circumstances.

You could:

  • Withdraw part of your pension, making small withdrawals whenever you need some money. But you may have to pay fees each time you do, and income tax may be payable.
  • Cash in your whole pension. Although pension rules allow this, you are likely to pay a sizable tax bill and you may struggle to fund your retirement unless you have other pensions you can use to generate a regular income.
  • Go into drawdown. This is where you leave your pension invested and take income from it when required. You may decide to invest in funds that are designed to provide you with a regular income.
  • Buy an annuity. You could use some or all of your pension to purchase an annuity which will give you a guaranteed income for life.
  • Do a mix of all of the above. You don’t have to choose just one option. You could take your 25% tax-free lump sum, buy an annuity with some of your remaining pot and then leave the rest invested to provide an income.
  • Do nothing. If you aren’t planning to retire for a while, or don’t need the money yet, you can leave it alone and access it down the line. Just think about whether you want to move your pension investments into lower-risk assets as you approach retirement.

What you do with your pension is entirely up to you, and it can be a big decision. There are a few key times in your life when getting professional financial advice can prove invaluable: this is one of them. An Independent Financial Adviser (IFA) can help you make informed decisions, so that you get the most out of your pension.

» MORE: Guide to planning for retirement

What about defined benefit pension withdrawals?

Defined benefit pensions are not as accessible as defined contribution schemes.

If you have a defined benefit pension you may be able to take your whole pension as a single lump sum once you are 55 if the total value of all your pension savings is less than £30,000, or the pension in question is worth under £10,000. If you do this, only the first 25% will be tax-free. The rest will be taxed at your income tax rate.

» COMPARE: Personal pension providers

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About the author:

Ruth is a freelance journalist with 15 years of experience writing for national newspapers, magazines and websites. Specialising in savings, investments, pensions and property. Read more

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