If I take 25% of my pension, what happens to the rest?

From the age of 55 you can start to access your private and most workplace pension schemes. And I’m sure you’re aware that the first 25% of your pension can be taken tax-free. This has become a very popular option for many to help with things like paying off a mortgage or funding essential home improvements.

So, what happens with the rest of your savings once you have taken your tax-free cash? Well, this all depends on the type of scheme you have.

Releasing pension money early isn’t right for everyone as it will leave you worse off in retirement.

What if I have a defined contribution scheme?

If you have a defined contribution scheme, any money placed into your pension over the years would have been invested in the stock market. This is how your pension pot grows for retirement. When you withdraw money from this type of pension, the rest of your funds remain invested. So, your pot has the potential to continue to grow until you start taking a regular income.

What if I have a defined benefit scheme?

Defined benefit schemes work a little different. While your money is still invested, the return of the investments will not impact your retirement income as this type of scheme guarantees you a set income for life from your retirement age. When you take your tax-free cash, this guarantee remains in place. However, in some cases, withdrawing your tax-free cash can reduce the income you will receive at retirement.

Do I have any other options?

Absolutely. If you have a defined contribution scheme you might decide that you want a more secure retirement income. In which case, you can use all or some of the money left in your pension to buy an annuity. This is when you sell your pension fund to an insurance company and in return, they promise to pay you a guaranteed income throughout your retirement.

How will the rest of my pension be taxed?

All the while your savings are in your pension, you are not paying any tax on them. It’s only when you withdraw the money that tax comes into play. And only the first 25% is tax-free. So, when you start to make further withdrawals after taking your tax-free cash, the money will be subject to income tax at your marginal rate. It’s a good idea to keep an eye on how much you are withdrawing from your pension as taking too much in one go could push you into a higher tax bracket and you could be lumped with a large tax bill.

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

Share this

Thinking about your pension options?

We can help you make the best possible decisions when it comes to your pensions. We are authorised and regulated by the Financial Conduct Authority.

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.
0800 009 3388
Mon-Fri 9am-5pm


Pension Access is a trading name of Harbour Rock Capital Limited which is registered in England & Wales as a Limited Company, No. 10290349. Authorised and regulated by the Financial Conduct Authority, No. 754580. Registered Offices: Affinity House, Beaufort Court, Sir Thomas Longley Road, Rochester, Kent, ME2 4FD. Telephone: 0800 009 3388. Email: pensionaccess@harbourrockcapital.co.uk
© 2024 Pension Access. All right reserved.
What's in your info pack?
Your FREE information pack contains all the information you need to make an informed decision on wheter or not taking tax free cash from your pension is right for you.
Get your Free Info Pack
Complete the form and we'll send you an information pack in the post
Note: We are unable to advise on the state pension or any pension you are already taking an income from.

    Get your free info pack

    Where should we send your info pack?

    Please complete your details below and we'll send your information pack in the next available post

    Find Your address

    Type in your postcode or start typing your address then select from the drop-down list

    Your address

    We'll post your information pack here

    Keeping in touch

    We'll send you updates by email or text message. One of our specialists may call, just in case you have any questions about your pension. We’re big believers in never bombarding people with calls.

    Safety PadlockYour information is safe with us. Our calls are recorded for regulatory, legal and training requirements. Please see our privacy notice for information on our data practices here


    Hands using calculator to calculate home equity amount