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Published 11 April 2024
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Pension Withdrawals: Limits, Rules and Taking a Pension Early

If you are 55 or over and have a defined contribution pension, you usually can start making pension withdrawals. Sometimes you can do this before age 55, but you may have to wait until you’re 65 if you have a defined benefit scheme.

Knowing when you can make pension withdrawals, and understanding the rules for withdrawing a pension, are a crucial part of retirement planning. This is particularly true given the amount of control retirees now have over how they withdraw 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.

Whether you’re wondering if you can withdraw your pension early or how much pension you’re allowed to take, you can find out all you need to know about making pension withdrawals in this guide.

When can I withdraw my pension?

If you have a defined contribution pension and are 55 or over, you should be able to start making pension withdrawals.  If you still have a way to go until retirement, it’s important to note that this age is set to rise to 57 in 2028. In certain circumstances, you may be able to access your pension savings before you are 55. These might include if you are in ill health or if you 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 your pension invested will allow it to carry on growing and also reduce the number of years you’ll need it to fund your retirement.

If you have a defined benefit pension, also known as a final salary pension, it’s possible you could 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.

Can I withdraw my pension before 55?

There is no law to stop you withdrawing money from a pension before you turn 55, but unless you meet certain criteria, the tax and fees you’re likely to pay mean it might not be the sensible thing to do. 

You may be allowed to access your pension early and avoid onerous taxes and charges if:

  • You are in poor health or have a serious medical condition, which means you can’t work. 
  • 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).
  • Your pension has a lower than usual protected retirement age, for example if you’re an elite sportsperson.

If you don’t meet the above criteria and you withdraw money from your pension, HMRC could charge you up to 55% tax on the amount you withdraw. Because of the hefty tax charge on early pension withdrawals, and the fees you’re likely to be charged by your pension provider, most reputable pension companies will strongly discourage you from accessing a pension early.

If you’re unexpectedly offered the chance to access your pension early, there is a good chance this will be a pension scam. 

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 applied to smaller withdrawals. The remaining 75% will be subject to income tax.

Depending on the size of your withdrawal this could add up to a sizeable tax bill, particularly if it pushes you into a higher income tax bracket.

If you are cashing in a whole pension, you should think carefully about how you will use that money to fund your retirement, particularly if it’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, rather than withdrawing it to sit in a current or savings account.

What tax will I pay on pension withdrawals?

If you’re at least 55 (rising to 57 on 6 April 2028) you can take up to 25% of your pension as a tax-free lump sum. If you make use of this allowance in one go, the income you then take through an annuity or pension drawdown will be subject to income tax at your marginal rate.

If you’re not ready to draw an income, and therefore can’t yet access your 25% tax-free lump, another option is to leave your pension fund invested, and withdraw lump sums as and when you want. Known as ‘uncrystallised funds pension lump sums’, 25% of each partial withdrawal made this way will be tax-free, and the remainder will be taxed as income.

The exact options available to you will depend on what’s available through your own pension. If you are unsure you can contact the provider or seek assistance from a financial adviser.

The pension lifetime allowance was a tax charge that was payable if your combined pension benefits exceeded a certain amount but was abolished in April 2024. Instead, lump sum allowances have been introduced. For most people, the ‘lump sum allowance’ related to the benefits you take from your pension is set at £268,275, while the ‘lump sum and death benefit allowance’ is £1,073,100. The limits may be different if you have certain lifetime allowance protections in place. 

Generally, no tax is payable if you remain within these limits; however, if they are exceeded, the excess will be taxed at your marginal rate of income tax.

However, this is a complex area and one you should discuss with your pension provider or a financial adviser if you’re approaching these limits. 

Paying emergency tax and pension withdrawals

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. Once your tax position has been clarified, you will be issued with a new tax code.

How can I withdraw my pension? 

There are a number of options for accessing a defined contribution pension, and how you turn yours into a retirement income is up to you. 

You could:

  • Withdraw part of your pension, making small withdrawals as and when you need, although you may have to pay fees and income tax each time you do.
  • Cash in your whole pension, but with the consideration that you may face a sizeable tax bill and could struggle to fund your retirement, especially if you mismanage these funds and don’t have other retirement income to fall back on.
  • Go into drawdown, where you leave your pension invested and take income from it when required. Pension drawdown offers flexibility in the amount and timing of withdrawals but carries the risk you’ll run out of money if you take too much too quickly. 
  • Buy an annuity using some or all of your pension, which will give you a guaranteed income for life. A pension annuity gives peace of mind you’ll always have a regular income, but you might not get full value from your pension if you die early.
  • Opt for a mix 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’re not ready to retire, or can live comfortably without any extra income, you can leave your pension untouched and access it further down the line. One consideration here might be to move your pension investments into lower-risk assets to protect the value of your pension fund. 

Which path is right for you will depend on your circumstances and what you want from your retirement. But making any kind of withdrawal from a pension is never a decision to be taken lightly, as the correct decision on whether to take funds and how this should be done will differ from person to person. Seeking professional advice or guidance is almost always a sensible idea and could prove invaluable in the long run. 

» MORE: What are your options for cashing in a pension?

What about defined benefit pension withdrawals?

Defined benefit pensions aren’t usually 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 as long as 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 marginal rate of income tax. 

Transferring a defined benefit pension to a defined contribution scheme such as a personal pension or SIPP may give you more flexibility over withdrawals. However, as pension transfers of this kind often result in the loss of valuable benefits and guarantees that you might be better off keeping, getting financial advice before you proceed is important and in some cases this is a legal requirement.

Image source: Getty Images

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