Deciding when to access pension savings
A life event might mean you feel you need to access your pension earlier than you expected. You can start withdrawing from most pensions at age 55 (rising to 57 in 2028). Most pension companies need a bit of time, sometimes a few months to set your pension up, so bear this in mind when accessing your pensions.
Taking a pension early can give you access to money sooner, if you need it. You can often take up to 25% tax-free, which can help with large expenses, such as paying off a mortgage. But, taking your pension early often means it will have less time to grow and your pension will be lower.
You can access a pension and keep working. Everything will be added together and classes as income, so this could push you into a higher tax bracket. You can also keep saving into other pensions, but doing this can bring you into a tax loophole called the Money Purchase Annual Allowance. If you claim one pension and save into another, you can save a lower amount into your other pension before paying tax.
If you can afford to wait and take your pensions later, your pensions will usually be higher. But don’t delay too long or you may not fully enjoy your pension savings due to health issues or reduced mobility. Some people pass away before accessing their pension, meaning they don’t benefit from the savings they worked for.
You can usually find out how much your pension with us will be if you take it early on PensionsOnline. You can always ask us for figures to help you decide if accessing your pension early is right for you.
Considering annuities, drawdown, and lump sum options
Buying an annuity is a big financial decision. It provides excellent security as it provides you with a guaranteed income for retirement.
You can choose between fixed payments that stay the same each month, or annuities that increase each year. Annuity income is subject to income tax.
Different annuity providers offer different starting rates, so comparing options can help you get the best deal. This is a helpful place to start: Compare guaranteed income products (annuities).
Annuity rates tend to improve as you get older, so timing your purchase can change how much you get. The younger you are, the longer your annuity is likely to be paid for so it starts lower. If you are in poor health, you can often get an enhanced annuity.
Before going ahead with annuity, be sure it is right for you. Once you buy an annuity, it’s locked in and you can’t go back. Some annuities allow you to leave an income for a spouse or partner after your passing, but not all annuities offer this. If leaving money to your family is important to you, other options might be better.
Pension drawdown
Pension drawdown allows you to take money from your pension while keeping the rest invested, giving you flexibility in retirement. You can take money as and when you need it, until it runs out.
You can withdraw up to 25% tax-free, but the rest is subject to income tax. Your pension remains invested, meaning it can go up and down based on market performance.
If you opt for drawdown, you will need to keep a careful eye on how much you spend and when. Taking too much too soon could reduce your pension leaving you little to live off, so careful planning is essential. If this is a worry, you could consider mixing annuities and drawdown and guaranteed income for stability.
Some providers charge fees for managing drawdown funds, so compare costs before choosing.
If you have a smaller pension pot, or your life expectancy is shorter, taking your pension as a lump sum can provide immediate access to funds, but it comes with important considerations. You can withdraw 25% tax-free, but the rest is subject to income tax, which could push you into a higher tax bracket. If this happens, more of your pension money could disappear as tax.
A lump sum may seem appealing and help with any big expenses like paying off a mortgage, but withdrawing too much too soon could leave you short in later years.
