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Taking money from your pension savings soon? What you need to know

MoneyPlus Features Team

The important things to know about taking money from your pension savings. Plus tips to help make sure that your money lasts as long as you need it to and that you don’t fall victim to pension scams.

When and how – choice and flexibility

Thanks to pensions changes introduced five years ago – commonly known as ‘pension freedoms’ – if you have a modern flexible pension, you have a lot of choice over how you can take your pension savings. You may be able to:

  • take a flexible income or lump sums as and when you need to from your pension plan – often called drawdown. The rest stays invested but, remember, as with any investment, future growth isn’t guaranteed. Its value can go down as well as up and it could be worth less than what was paid in
  • set up a guaranteed income for life – also called an an annuity
  • take it all in one go
  • use a mix of these options – for example, use part to set up an annuity, and keep the rest invested in your pension plan to take out as and when you need

You can even take money while you’re still working from the age of 55, although this may change in the future.

But with this greater freedom and flexibility comes greater responsibility. So next we’ll look at what else you should be mindful of before making any decisions.

Consider the tax implications

The good news is that you can usually take 25% of your pension savings tax free, either in one go or spread over a longer period, although check this out with your pension provider.

You’ll need to pay income tax on anything over and above this. And if you take all of your pension savings at once, you could pay more income tax than you need to. Take it over a number of years, and it’s likely to be more tax efficient, which means you’ll get to keep more of your money.

In addition, if you take anything over 25% (even £1!), this will usually limit what you can pay into your pension plan in the future. That’s important if you’re still working and plan to save more into it. The standard amount you can usually pay into a pension plan is £40,000 a year, but this goes down to only £4,000 a year if you’ve taken more than your 25% tax-free cash.

You can read more about the tax implications of taking money from your pension savings on the Pension Wise website.

Please note: tax rules and legislation can change. Information is based on our understanding of laws and current HM Revenue and Customs practice as at May 2020. Your individual circumstances, including where you live in the UK, will have an impact on the tax you pay.

Think about the impact of taking money early

Taking some of your pension savings when you’re 55 may seem appealing. And it’s understandable that in the current economic environment some people may be looking at their pension savings as a way to supplement reduced earnings.

But bear in mind that this could have an impact on how much you have left to live on later, particularly if you take it out when markets are volatile like they currently are.

This is because once you’ve taken money out, you’ll have less money remaining invested to recover potential losses if and when markets (and your pension investments) rise again in value. And this might affect how long your money lasts.

The reality is that the impact of the coronavirus pandemic on financial markets and pension investments may lead to people having to re-think their retirement plans, for example carrying on working for longer, moving to part-time working instead of fully retiring, or using other savings before they start tapping into their pension savings.

Avoid scams

As we covered in our recent article Staying safe during the coronavirus outbreak – this time, online, the coronavirus pandemic has led to concerns that criminals and scammers are looking to exploit the fact that more of us are dealing with our finances online. Indeed, Action Fraud, the UK’s national reporting centre for fraud and cybercrime, said in March that coronavirus-related fraud reports had increased by 400%.

The impact of being a victim of a pension scam could be particularly devastating given that your pension savings could be worth tens or even hundreds of thousands of pounds. So it’s important to be aware of ways in which scammers try to target people – here are some of the most common ways:

  • You’re contacted out of the blue by phone, email or text, and you’re pressured into signing up for something
  • You’re promised a free pension review
  • You’re promised higher returns on your pension savings, or you’re encouraged to put your money in unusual investments or complicated schemes
  • You’re offered help to release money from your pension savings when you’re under 55

There are various tools and resources out there that can help you identify and avoid potential scams, including the Financial Conduct Authority’s ScamSmart website and a new interactive game Scam Man and Robbin’.

In this, you have to correctly identify six of the most common pension scams and zap them. If you fall victim to too many, your pension pot balance will drop to zero, and you’ll have to start all over again. The site also gives information on how to help protect yourself against scams and where to go for help if you suspect a scam.

The importance of proper guidance and advice

There’s a lot to think about when it comes to taking money from your pension savings. So it’s important to get guidance or financial advice before making a decision. Before taking money from your pension savings, it’s also important to shop around to find the best deal for you. Your pension provider may not offer the option you want or other providers may offer a better deal. It’s worth comparing what each provider can offer.

The Pension Wise website provides a wealth of free and impartial information to help you understand your options when you’re coming up to retirement, including more about shopping around for the best deal. If you’re age 50 or over, you can also book an appointment to get specialist pension guidance either over the phone or face to face.

The Pensions Advisory Service website is another great source of free information on things like your choices at retirement and the State Pension.

Alternatively, a financial adviser can provide you with a tailored plan that meets your individual needs. If you don’t have one you can find one local to you at Unbiased. Bear in mind that there’s likely to be a cost for getting advice, but it could be worth it in the long run.

If you have any questions about the impact of the coronavirus pandemic on your pension savings and investments, have a look at our Coronavirus FAQs.


The information in this article is based on our understanding in May 2020 and should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in.

Standard Life accepts no responsibility for information in external websites. These are provided for information only.