Want to know if you can start taking money from your pension plan but keep working and saving? The short answer is, yes you can. There are lots of reasons you might want to access your pension savings before you stop working and you can do this with most personal pensions from age 55 (rising to 57 in 2028). But there are some important things to consider first.
Since the introduction of new pension rules in 2015, which allowed for more flexible retirements, it has been an option for most people to start taking money from their pension plan without having to give up working life and while still paying into their pension pot.
Maybe you want to be able to afford to reduce your work hours before taking your State Pension or take early retirement and enjoy that holiday of a lifetime. Or maybe the money could be useful for supporting your children through school or university.
We take a look at five things you need to consider when you start taking your pension money while you continue to work and pay in.
1. Starting to take your pension savings at 55 but continuing to work - the basics
You can normally start to withdraw money from your personal or workplace pension plan from age 55 while continuing to work. Last year the Government confirmed that this will rise to age 57 from 2028, and it may change again in the future. You can usually withdraw a quarter of your money (25%) tax-free. So if your pension pot is valued at £100,000, that’s £25,000 tax-free.
You can take your tax-free cash as one lump sum, or in stages if your pension scheme allows it. Do check with your provider as not all pension plans let you do this.
Anything above your tax-free cash is taxable, just like any other income is. Our guide on Ways to take your money explains more about your retirement options, how pension schemes are taxed and how to take your money tax efficiently.
2. Why it can make sense to keep contributing
Paying into your pension pot can make sense, whatever your age. And if you are in a workplace pension, your employer may contribute too – a valuable pension benefit you don’t want to miss out on. Some employers will even offer pension matching arrangements. So the more you pay in, the more they will too.
On top of that, it’s important to take into account the tax benefits you get on contributions into your plan, which can make your pension plan one of the most tax-efficient ways to save for your retirement.
In a nutshell, your contributions are topped up by the government – what’s known as tax relief. Most UK taxpayers will get a 20% top-up from the government on their pension contributions, so it’ll only cost you £80 to pay £100 into your pension. The benefits are usually even more for higher or additional-rate taxpayers, although you’ll need to claim anything above 20% back from the government depending on how your contributions are being paid.
Some workplace pension schemes offer tax benefits in a different way (salary sacrifice or salary exchange schemes, for example). So do check with your employer how this works for you if you’re not sure.
You can find out more about pension top-ups on our website or if you want adjust your regular contributions or make a one-off payment to your Standard Life plan you can do so online or via our mobile app. Bear in mind that your pension is an investment. Its value can go down as well as up and you could get back less than what was paid in.
3. Is there a limit to how much I can contribute?
You have an ‘annual allowance’ which can limit the amount you can pay into your pension plan – regardless of what you earn.
The annual allowance is the total amount that can be paid into any of your pension plans in a tax year and includes contributions from you, your employer and any third party. The limit is currently £40,000 or the amount you earn in a year, including tax breaks – whichever is lower. If your contributions go over this amount then you might face a tax charge.
In some cases, a reduced annual allowance could apply. For example, in some circumstances taking a taxable income from your pension plan could trigger the Money Purchase Annual Allowance, which is £4,000 per tax year. That’s a big difference to be aware of.
You also have a lifetime allowance – the total amount of pension benefits that you can build up during your lifetime across all pension schemes before an additional tax charge applies. You can read more in our pension lifetime allowance guide.
4. Pros and cons of taking my pension money early and continuing to work
Something you should consider carefully is whether to withdraw from your workplace or personal pension at 55 at all.
On the up side, the income could come in useful and allow you to reduce working hours if you’re considering a phased retirement or semi-retirement.
If you choose to use the money to buy a guaranteed income – also known as an annuity – that could give you a regular income throughout your retirement.
Accessing money from your workplace or personal pension plan could help provide some income before you are eligible for your State Pension. State Pension age – the earliest age at which you can start receiving State Pension – rose to 66 last year and is due to increase to 68 between 2044 and 2046.
Accessing your personal pension pot early may also give you the option of taking your State Pension later which, in some cases, could mean you receive more later on. You can find out more about your State Pension and new proposals which could affect the State Pension age in our article Changes to State Pension – here is what you need to know.
It’s also important to consider that taking money can affect your pension pot’s potential to grow even if you are still contributing to it.
You need to manage your withdrawals and plan a retirement income for your whole retirement to make sure your pension pot lasts as long as you need it to. And don’t forget, contributions to your plan could be restricted if you take more than your tax-free cash amount.
Think about whether there are other sources of income that could be accessed first like an ISA (Individual Savings Account) or savings?
The longer you leave your money invested, the more potential it has to grow, but remember, that is not guaranteed and it's possible you could lose money.
5. Get more support and guidance
To find out what your options are, contact your pension provider. You could also get free impartial guidance with Pension Wise, a service from MoneyHelper, if you're aged 50 or over. Go to their website or call 0800 011 3797. It's important to shop around and compare pension providers to get the best deal for you.
You might want to take advice on something so important. If you don’t have an adviser you can find one local to you at unbiased.co.uk. There’s likely to be a cost for this.
The information here is based on our understanding in April 2022 and shouldn’t be taken as financial advice.
Laws and tax rules may change in the future and your own personal circumstances, including where you live in the UK, will have an impact on tax.