Pension rules are more flexible than they used to be, usually enabling you to take money from your retirement savings once you reach the age of 55 (rising to 57 in 2028) even if you are still working.
The way we work has changed dramatically over recent decades, and today’s pension rules, introduced in 2015, are designed to make it possible to continue working into your 50s, 60s and sometimes beyond, and to phase your retirement if you wish. This way, you can take money from your pension to supplement your income until you stop working completely, with growing numbers choosing this route to help them cover rising living costs.
However, make sure you understand the risks involved in taking money from your pension before you stop working. It’s really important to consider the long-term impact this could have on your retirement income, the amount of tax you’ll pay, and any benefits you receive before you proceed. You can find out more about some of the drawbacks of taking money out of your pension in our articles Should I use my pension to boost my income?, Four big risks of dipping into your pension and Should I take my tax-free cash at age 55?
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
Here we explain some of the things you’ll need to consider if you’re planning to take your pension while continuing to work.
Contents
- Can I take my pension at age 55 and still work?
- What are the advantages of taking my pension while continuing to work?
- What are the drawbacks of taking my pension while continuing to work?
- How much tax will you pay on your pension if you’re still working?
- How can I access my pension from age 55?
- Where can I get advice on taking my pension?
Can I take my pension at age 55 and still work?
Yes, current pension rules usually enable you to access your private or personal defined contribution pension from age 55 (rising to 57 from 2028) and do as you wish with your lifetime savings. You can take up to 25% of your pension as a tax-free lump sum, with any further withdrawals taxed as income at your marginal rate (see more below). The majority of pensions are defined contribution plans, and you can read more about how this type of pension works in our article What is a defined contribution pension? Meanwhile, you can continue working as long as you like while using your pension to supplement your income. You may want to reduce your hours, go part-time, or search for other employment opportunities before you stop working for good.
However, if you have a defined benefit, or final salary pension, the rules are different, as most schemes have a retirement age of 60 or 65. With this type of pension, you usually can’t start receiving an income from your pot until then, although you may be able to take your pension from age 55 in some cases (for example, if you’re willing to accept a lower income from your pension in retirement). Check the precise age you can access your pension with your scheme provider. Read more in our article What is a defined benefit pension? and When can I retire?
You can receive your State Pension while continuing to work. However, the current State Pension age is 66 for both men and women (rising to age 67 by 2028) so there’s around a 10-year gap between when you can take your money from a workplace or private pension and your State Pension age.
Alternatively, you can choose to defer your State Pension if you don’t need the income yet, to receive a greater amount at a later stage. Read more in our articles How the State Pension works and Eight reasons you might decide to defer your pension.
What are the advantages of taking my pension while continuing to work?
Taking money from your pension before you have fully retired could give you greater flexibility in your working life. You may want to reduce your working hours, for example, while taking money from your pension, so you can gradually move towards retirement. This may be a good way of building up to stopping work completely, benefiting both your physical and mental health.
Or, you may want to leave your job and set up your own business, but need some income from your pension to meet everyday costs. Perhaps this is something you’ve been dreaming of for a while, and this way you can still receive an income stream while you build the business. Essentially, being able to access your pension gives you options. You can read more in our article How can I phase my retirement?
What are the drawbacks of taking my pension while continuing to work?
These days, you may have no option but to work for longer while taking money from your pension to make ends meet, as although inflation has fallen considerably since last year, it remains double the government’s 2% target. Read more in our article What does inflation mean for my money? However, it’s important to remember that taking money from your retirement savings now could reduce your long-term pension income, leaving you with less to live on later in life.
There are several other drawbacks to consider, too. You’ll potentially lose a greater proportion of your pension to tax (more about this later), and increasing your earnings by supplementing them with money from your pension may affect your entitlement to certain benefits. Pension income is treated exactly the same as any other type of income you receive, so it’s subject to income tax at your marginal rate above your Personal Allowance (this is the amount of income you can receive each year before paying tax, and it’s frozen until 2025/26 at £12,570). Read more in our article How much tax will I pay when I withdraw my pension?
Depending on your circumstances, another downside may be that once you start withdrawing money from your pension, the amount you can pay into your pension and receive tax relief falls. Under current pension rules, you can pay up to £60,000 a year into your defined contribution pension, known as the Annual Allowance. However, once you start taking money out of your pension, this falls from £60,000 to £10,000, and becomes known as the Money Purchase Annual Allowance (MPAA). Learn more about these allowances in our article What is the Money Purchase Annual Allowance and How do pension allowances work?
There’s also the risk that by taking money from your pension now, you may not end up with enough to last you until you pass away. It’s worth getting to grips with roughly how much you might need to fund a comfortable retirement, and you can find out more about this in our article £14,400 annual income needed to retire, say pension experts.
However, you may have other income sources you can dip into as you move towards full retirement, such as money in individual savings accounts (ISAs) or from an investment property, for example, before turning to your pension.
How much tax will you pay on your pension if you’re still working?
One of the major considerations when it comes to accessing your pension from age 55 is how much tax you will pay on withdrawals. You can take up to 25% of your defined contribution pension as a tax-free lump sum, but the rest will be classed as income for income tax purposes. This means that you must take care not to push yourself into a higher rate tax bracket by supplementing your earnings with your pension. Read more in our article How much tax will I pay when I withdraw my pension?
For example, if you withdraw £30,000 from your pension as a lump sum, this money will be added to your earnings for that tax year, and taxed at your marginal rate. Depending on how much you earn, this could push you into a higher rate bracket so you end up paying more tax.
It’s important to manage your withdrawals carefully to ensure you don’t pay more tax than necessary. For example, you may decide to take just enough from your pension to stay within the basic-rate tax bracket. You pay tax on your pension income at your marginal rate, so any income above £12,570 (your annual personal allowance) is taxed at the basic rate of 20%, rising to the higher rate of 40% on income above £50,270 and additional rate tax at 45% over £125,140.
A professional adviser can help you tax-efficiently manage your pension withdrawals, and ensure you won’t run out of money at a later stage (see below).
If you have a defined benefit, or final salary pension, you’ll typically be able to withdraw a tax-free lump sum, too, and a guaranteed income for the rest of your life. But the age at which you can receive this money (including the lump sum) is typically age 60 or older. Read more about how this type of pension works in our article What is a defined benefit pension?
How can I access my pension from age 55?
This depends on your personal circumstances and how much income you need, as you have a wide variety of options. You can read more about these in our article Your pension options at retirement. You’ll need to consider your options carefully to make the right choice for you and your personal circumstances.
As mentioned, you can take out 25% of your pension fund as a tax-free lump sum from age 55. You can spend this money however you like, and you don’t have to take it all at once. For example, you may want to continue working, and top up your income for a period of time with some of this tax-free cash. However, if you don’t have any great need for the money, think carefully about whether you’d be better off leaving it to grow in value. Bear in mind that you may make better tax-efficient use of this cash once you’ve stopped work completely.
You may also want to consider pension drawdown if you’re looking for flexibility beyond taking some tax-free cash, by taking a variable income from your pension. Read more about how this works in our article What is pension drawdown and how does it work? The remainder of your pot stays invested, and over the long term this will hopefully grow in value, although this isn’t guaranteed. You could also buy a small annuity with some of your pension for some guaranteed income, while leaving the remainder invested. Read more in our article Annuities explained.
Before making any decisions, it’s important to consider taking professional advice, so that you can be sure you’re making the right choice.
Where can I get advice on taking my pension?
Even if you’re only considering taking a small amount from your pension to supplement your income, you may want to seek guidance or advice. If you’re aged 50 and above the Government’s Pension Wise service, run by the Pensions Advisory Service and Citizens Advice, offers free guidance on their pension choices at retirement. You can give them a call on 0800 138 3944 to book a free appointment, or you can book one via their website.
It’s always worth taking advantage of a free appointment with Pension Wise, however if you want advice that’s tailored to you specifically, you’ll also need to speak to a financial advisor, as Pension Wise can only provide general guidance and not individual recommendations. In this case, our guide on How to find the right financial advisor for you might be helpful.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
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