Can I take my pension at 55 and still work?

With the introduction of the Pension Freedoms Act in 2015, you now have a range of options that allow you to flexibly withdraw your pension pot from the age of 55. And you don’t have to be retired to withdraw this money.

There are lots of reasons people decide to start withdrawing their pension money early. Some of the most common are:

  • Clearing off debts or a mortgage before retirement
  • Making essential home improvements
  • Topping up their income to reduce their working hours

However you decide to withdraw your pension at 55, there are a few things to consider. Let’s take a closer look.

What is pension release?

When looking into taking money from your pension early, you may have come across the term pension release. Pension release is simply the act of releasing money from your pension before you retire. And you have a few options for how you can start withdrawing your savings.

What are my options at 55?

Since 2006, people have been able to take their tax-free lump sum from their pension from the age of 55. Now you have even more options available to you. As well as taking all or some of your tax-free cash, you can also:

  • Take more than your tax-free cash allowance as a lump sum
  • Start taking an income
  • Withdraw your whole pension

Not every option is right for everyone so it’s a good idea to first take a look at your pension and consider both your current and your future needs to know what is right for you.

How do I know what option is right for me?

The reason that not every option is right for everyone is because releasing pension money early will leave you worse off in retirement. This is why it’s important to consider both your current and future needs, as well as your financial circumstances.

The best thing to do is to speak with a financial adviser. By asking them to check your pension for you, you can learn:

  • The current value of your pension
  • How to improve its performance to potentially leave you with more money when you come to retire
  • What options are best for you when withdrawing your savings.

They can make sure that you don’t fall into any of the common pitfalls when releasing your money and ensure that you are keeping your future safe while doing so.

What if I have a final salary pension?

Final salary, or defined benefit, pensions work a little differently and so the options available to you will all depend on the individual rules of the scheme that you have. Final salary pensions are greatly valuable as they come with a number of benefits and guarantees, such as a guaranteed income for life from a set age. This means that your retirement income is secured rather than you having to worry about building up the value of your pension.

Most final salary pensions allow you to withdraw your tax-free cash. How and when you can do so all depends on the pension provider. Taking this cash could also reduce the income you receive throughout retirement.

Due to the way final salary pensions work they don’t have a monetary value. This means that pension release isn’t an option. If you want to withdraw more than your tax-free cash allowance, then you would need to transfer this pension to what’s known as a defined contribution pension. And this means giving up those valuable benefits.

If you are wanting to withdraw your final salary pension then it’s a good idea to first speak with a financial adviser. They can help you understand the benefits your pension includes and know if giving these up is right for you.

What about tax?

When releasing money from your pension at any age, it’s important to take tax into consideration. This is because while the first 25% of your pension can be taken tax-free, any further withdrawals are subject to income tax at your marginal rate. So, taking too much from your pension in one go could mean getting stung by a large tax bill.

This is especially important if you’re still working because both your income from employment and any money you take from your pension will go towards your annual allowance. And exceeding this allowance will push you into a higher tax bracket.            

A financial adviser can help you work out how much you can withdraw from your pension in any given year to stay within your allowance.

Tax treatment depends on your individual circumstances and may be subject to change.

If I take money from my pension, what happens to the rest?

The answer to this question all depends on the type of scheme you have. If you have a final salary pension then you have a guaranteed income for life from a set age. While releasing your tax-free cash may reduce the amount you receive, this guarantee remains in place.

If you have a defined contribution pension then any money remaining in your pension stays invested, helping your pot continue to grow over time.

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Thinking about your pension options?

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.
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