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Take the tax-free lump sum (usually 25% of your pot) and leave the rest invested. It is important to note that any amount you withdraw from your pension after taking your 25% tax free lump sum will be taxed at your marginal income tax rate.
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Take a series of lump sums from your remaining pot when needed.
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Take a regular income from your pension pot.
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Withdraw the entire pot in one go.
You can mix and match these options, and any money remaining in your pot continues to be invested, giving it the potential to grow. But unlike an annuity, with pension withdrawal your income isn't guaranteed for life. There is the risk that your money runs out too early.
It is important to check with your pension provider what specific options are available for your scheme.
Who can withdraw their pension?
To withdraw your pension early in the UK, you must:
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Have an eligible pension scheme.
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Be aged 55 or over, which is increasing to 57 on 6 April 2028.
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Have a defined contribution pension (DC). Examples include personal pensions, stakeholder pensions, and most employer schemes.
You might be able to withdraw money from your pension earlier than 55 if you are unable to work due to ill health, or if you have a reduced life expectancy. This is dependent on your pension scheme. It is important to check with your provider to see if this is an option that is available to you.
Defined contribution pensions, sometimes called money purchase pensions, are schemes where contributions are invested to build up a pot of money. Your eventual retirement income depends on your contributions, your employer’s contributions (if they have made any), and factors like investment growth.
Pensions you typically can't withdraw from yet include:
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Final salary or defined benefit (DB) pensions – we will cover DB pensions in more detail in another section
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Public sector pensions like the NHS, teachers, civil service, police, and armed forces
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The State Pension
Always check your specific pension scheme rules to be sure.
Taking your tax-free lump sum
If you have an eligible scheme, at age 55, you can take up to 25% of your pension pot as a tax-free lump sum. With multiple pots, you can take 25% from each individually.
Tax-free cash doesn't count towards your income for that tax year. However, after the 25% allowance, further withdrawals are taxable at your marginal income tax rate.
While the idea of withdrawing a tax-free lump sum can be appealing, especially if you have an immediate financial need, it is important to consider that any early withdrawal from your pension will leave you worse off in retirement. Consulting with a regulated financial adviser can ensure that you have been informed of all of your options before making a decision.
Tax on pension withdrawals
Once you've taken your tax-free cash, further withdrawals count as income. This means they're added to your income from other sources, like your salary, and taxed accordingly at your marginal income tax rate.
The rates for 2023/24 are:
Basic
rate: 20%
(£12,571 to £50,270)
Higher
rate: 40%
£50,271 to £125,140
Additional
rate: 40%
over (£125,140)
Please note that the rates differ if you are living in Scotland.
If withdrawals push you into a higher tax band, you could pay a significant amount of extra tax. Consulting with a regulated financial adviser can help to make you aware of the regulations regarding taxation and how to avoid high tax bills.
If your annual income, including salary and any pension income, is below £100,000 per year, then your annual income tax personal allowance will not be affected. However, once you start earning £100,000 or more, your personal allowance steadily decreases until you reach £125,140, at which point, you no longer receive tax relief on any of your earnings. So, if you withdraw a large pension lump sum and this takes your total annual income over £100,000, your income tax personal allowance will be affected for that year.
It is also important to consider that a pension withdrawal can affect your means-tested benefits. For example, Universal Credit is a means-tested benefit that is affected by income and savings. If you and/or your partner have £16,000 or more in your savings, you will not be entitled to Universal Credit. Consulting with a benefits specialist can offer some clarity regarding the impact of any withdrawal you make on your means-tested benefits.
All our opinions regarding taxation and related matters are based on our understanding of the current tax law and practice of HMRC, which is subject to change.
Scams and pension withdrawal
Sadly, scammers try to take advantage of the pension freedoms. Common tactics include:
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Contacting you unexpectedly about your pension
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Promising very high returns and downplaying risks
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Rushing you to make a quick decision
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Suggesting you withdraw your whole pot at once
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Offering complex investment structures you don't understand
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Claiming they know legal loopholes to access your pension before 55
You can check the FCA register to ensure any firm you use is authorised. Reject any unexpected offers and take your time to make all financial decisions.
You can check the Financial Conduct Authority register to ensure any firm you use is authorised. Reject any unexpected offers and take your time to make all financial decisions.
Final salary pension options
Defined benefit pensions, also known as final salary schemes, are very different to the defined contribution schemes we have been talking about. You do not have a pot of money. Instead, you have a promise from your employer or the scheme administrator to pay you a guaranteed income for life from a set age. The value of that income is dependent on a number of factors including your salary and your length of service.
Also, you cannot withdraw money directly from a defined benefit scheme. Instead, you would need to first transfer out to a defined contribution scheme. This would mean giving up your guaranteed income and any other associated benefits. That’s why, most of the time, the best thing to do is keep your defined benefit pension exactly as it is.
Some defined benefit schemes come with a tax-free cash option, which would mean a reduction in your guaranteed income.
Guaranteed benefits include:
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A set income based on your salary and years of service rather than investment growth
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Annual increases to your income in line with inflation
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A proportion on your income paid to your spouse or partner when you die
Transferring out is a complex decision - you must take financial advice if your pension is worth over £30,000. An adviser will assess if exiting is right for you based on factors like:
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Employer solvency - is there risk they can't pay?
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Your life expectancy.
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Your partner's age and if you want to provide for them.
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The critical yield - the investment return needed for a defined contribution pension to match your defined benefit income
It is always worth consulting with a regulated financial adviser, even if the value of your DB pension is less than £30,000.
Pension withdrawal options
There are a few ways to withdraw your defined contribution pension.
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Tax-free lump sum only - you can take just the 25% tax-free cash and leave the rest invested until needed later. This allows your pot to continue growing.
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Flexi-access drawdown - this involves moving your pension into a drawdown plan that allows you to take sums as and when needed. You can also take a tax-free lump sum upfront. There are no limits on how much money you can withdraw in one go. For this reason, if you take too much money too quickly, you could run out of money – especially if your investments perform poorly.
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Take lump sums - rather than an income, you can withdraw a series of lump sums from your drawdown plan as and when you need them. 25% of each will be tax-free (as long as you have not already taken your 25% tax-free lump sum).
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Annuity purchase - you can use some or all of your remaining pot to buy an annuity, giving you a guaranteed income for life.
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Mix and match - you don't have to stick to one option. For example, you could put some in drawdown, use some for an annuity and leave some invested. This mix and match approach lets you balance flexibility and security.
It is always worth consulting with a regulated financial adviser, even if the value of your DB pension is less than £30,000.
Things to consider before withdrawing your pension
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Your other sources of retirement income- will you have enough to live on by taking money now?
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Tax implications - as mentioned before, withdrawing a large pot could leave you with a significant tax bill.
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Future plans - do you have plans that require extra funds like helping children with deposits or going on a dream holiday? Or would you prefer to leave inheritance? Factoring in your plans can help decide if withdrawing your pension makes sense.
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Investment risks - opting for flexi-access drawdown or taking lump sums keeps the remainder of your pension invested in things like stock markets and bonds. While this allows potential growth, it also comes with investment risk that could reduce your pot's value if your investments perform poorly. Are you comfortable with this?
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Cost of advice - regulated financial advice helps ensure you withdraw your pension in the best way for your situation. Advice costs should be considered as an investment.
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Scam risks - sadly, scammers try to exploit people accessing pensions. Seeking regulated financial advice can help avoid scams.
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Your health and life expectancy - if you have reason to believe you have a shorter life expectancy, this may affect how you choose to withdraw your pension and use the funds.
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Guaranteed income needs - do you want the certainty of an annuity income over drawdown? Consider if an annuity purchase makes sense for your retirement income needs.
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Staying informed - our immediate financial needs can cloud judgement on big financial decisions. Try not to let the excitement of your available pot lead you to withdraw more than is sensible.
