How does Rest Less make money
We make money through advertising and commission from affiliate links, which enable us to offer Rest Less as a free service to our users. The content on this page may use affiliate links, which track traffic from our website to a third party provider and enable us to receive a commission or payment from any traffic we refer.
* Affiliate links on this page have an * next to them. We place enormous importance on our editorial independence and the integrity of our content which means that we will never change how we write about something as a result of an affiliate link.
If you’re planning to take money out of your pension, perhaps because you’re worried that pensions might be targeted in the forthcoming Budget, you might be wondering whether your timing is right, and how much you can withdraw without it dramatically affecting your future retirement income.
After all, the chances are you’ll have been paying into your pension for several decades by the time you reach your 50s or 60s, and are relying on this nest egg to fund your retirement for many years to come.
Here, we look at six questions that you should ask yourself if you’re considering withdrawing money from your defined contribution pension, so that you can be certain that you’re making the right decisions at the right time.
Advertisement
If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
1. What are your plans for the money?
Before you withdraw money from your pension, it’s essential to have a clear idea of what you’re going to do with it.
For example, are you planning to use it to pay off your mortgage, or are you thinking about going part-time and so want to take money out to supplement your reduced income? If you’re just taking it out because you’ve reached the point at which you can, or because you’re worried about potential tax changes to pensions, this could prove a costly mistake.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “If you are going to take your tax-free cash, you need to have a plan for what you’re going to do with it. Simply taking it and putting it in a bank account paying a low interest rate means that money misses the potential for further investment growth in the pension. Investments within a pension also grow free of tax, and unless you’re taking £20,000 or less, and putting it in an ISA, you’ll lose that protection against tax.
“It’s also worth saying that under current rules, money in a pension is usually free of inheritance tax – this is not the case with money in ISAs or bank accounts, so there’s also the chance that taking your tax-free cash now could land your family with a nasty tax bill in future.”
Bear in mind, however, that under changes announced in the October 2024 Budget, pensions are due to be brought into the scope of inheritance tax from April 2027, so this may affect your retirement and estate planning.
You can learn more about pensions and inheritance tax in our guides Can my pension be used to reduce inheritance tax? and 5 ways to beat pension Inheritance Tax Budget changes.
2. Will it bump up your tax bill?
You can currently take out up to 25% of your pension free of tax, up to a maximum of £268,250. That means if you have more than £1,073,000 in your pension, then the tax-free element you can take will be less than 25% of your pot.
Any further cash you take from your pension will be subject to income tax at your marginal rate, so depending on how much you take, your withdrawal could potentially push you into a higher rate tax band of 40% or more. That could see any of the tax benefits you made by initially investing in your pension wiped out.
One way to keep tax bills down is to take money out of your pension gradually, rather than in one big chunk. Put simply, the less income you take from your pension, the lower your tax bill will be, so if you can, ideally you should only take the amount you need from your pension each year.
Find out more in our article How much tax will I pay on pension withdrawals?
3. Are you looking for a guaranteed income?
Before taking money out of your pension, you’ll need to decide whether you want a guaranteed income, or whether you’re happy taking out money as and when you need it.
If you want a set amount each month to cover your essential living expenses, you may want to consider using some of your pension to buy an annuity, or a guaranteed income for life. However, an annuity usually stops when you die, so any remaining pension savings stay with the insurer providing the annuity – as opposed to being passed to your family. Find out more about how annuities work and the different types you can choose from in our guide Annuities explained.
Alternatively, if you want more flexibility, then drawdown allows you to withdraw money from your retirement savings whenever you need to. The rest of your pension stays invested, either with your current pension provider or another provider. When you die, any money that’s left in your pension pot, can be passed on to your loved ones tax-free if you’re aged under 75 when you die. If you’re aged over 75 when you die, your beneficiaries will simply have to pay income tax on any income taken from your pension. Learn more about drawdown in our article What is pension drawdown and how does it work?
Bear in mind that this doesn’t have to be an either/ or decision and you can opt to use both an annuity and drawdown to provide you with an income during retirement if you want to. If you’re not sure on the best option for you, seek professional financial advice.
4. Do you plan to carry on saving into your pension?
You might be confident that you can withdraw money from your pension and then top up your retirement savings at a later date, but there are strict rules in place that limit the amount you can pay in once you’ve started accessing your pension savings.
Under current pension rules, you can pay up to £60,000 a year into your defined contribution pension, known as your Annual Allowance. However, once you’ve started taking money in excess of your 25% tax-free lump sum out of your pension, your Annual Allowance falls to £10,000 and becomes known as the Money Purchase Annual Allowance (MPAA). The government introduced the MPAA to prevent people ‘churning’ their pensions (taking money out and then paying it back in) just to get tax relief.
Myron Jobson, senior personal finance analyst at Interactive Investor, said: “Once you start drawing a pension income, you need to be careful because your pension allowance may be reduced. Usually, the maximum amount you can pay into a pension each year and get tax relief is £60,000, but if you start taking taxable income, the Money Purchase Annual Allowance (MPAA) is triggered, which lowers your annual allowance to £10,000, including employer contributions.
“This could have a big impact as you won’t get any tax relief on payments over this amount. However, the MPAA isn’t triggered if you only draw tax-free cash or buy a lifetime annuity. So if you plan to continue beefing up your pension savings, the choices you make here are crucial.”
Learn more about how the MPAA works in our guide What is the Money Purchase Annual Allowance? and about how the various pension allowances work in our article Understanding your pension allowances.
5. Will you have enough money left for the rest of your retirement?
Consumer association Which? has a helpful drawdown calculator which can help you work out how long your pension savings might last based on the income you need, and other factors such as how much tax-free cash you want to take out, and where your savings are invested.
For example, if you have a pension pot valued at £200,000 and you take the maximum 25% as tax-free cash, this leaves you with £150,000 of retirement savings. Assuming this money is invested in a mix of fixed interest products and stocks and shares, and you want to draw down £10,000 a year to supplement your State Pension income, and you want this income to increase by 2% a year to keep up with inflation, you can expect to run out of money after year 21 of your retirement. This example assumes that once you retire, your cash investment grows at an average of 0.50% a year, fixed interest at 4.75% a year and equities at 7.25% a year.
If you wanted to take out £20,000 a year instead, and based on the same assumptions, you can expect to run out of money eight years into your retirement, which shows how vital it is not to take out too much too soon.
Of course, it’s impossible to predict exactly how long your pension will last once you start making withdrawals, as it will depend on how the investments your pension savings are invested in perform over time. That said, it’s worth crunching some numbers, or getting a professional financial advisor to do it for you, so you have a rough idea how many years your pension can provide you with an income. Learn more in our article How long will my pension last?
6. Could it be a scam?
If someone has suggested that you take money out of your pension, perhaps because they claim they’ve found an unbeatable investment opportunity, alarm bells should be ringing.
Some fraudsters will tell you that you can access your retirement savings before the age of 55. However, if you do so, not only will you have to pay a hefty tax charge to the Government, at least 55% but sometimes as much as 70% of your pension pot, but you’ll also have fees taken from your pension for the transfer, which can be 20% or more of your pension savings. Find out more about pension scams and how to avoid them in our article Don’t let scammers steal your retirement.
A final thought…
Working out the best time to withdraw money from your pension, as well as how much you should take, isn’t always straightforward, so it’s well worth seeking professional help on the various options that might be available
If you’re 50 or over and have a defined contribution pension, you can get free guidance on the options available to you from the Government’s Pension Wise service. However, if you want personal recommendations or advice about your specific circumstances, you’ll need to seek professional financial advice.
Advertisement
If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
Rest Less Money is on Instagram. Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.
Join the discussion
Read our full commenting terms and guidelines