Pension withdrawals: When and how to access your pension

If you’re in your 50s or 60s you may well be starting to think about retirement. While thoughts of travel and relaxation may be the first things that come to mind, there’s a lot to think about on the money front too. For instance, when should you access your pension pot, and how exactly do you go about it?

When can you access your pension?

Most private pensions in the UK can be accessed from age 55 (rising to 57 in 2028), with earlier access possible only in rare cases like ill health.

Can I take money from my pension early?

Early access to pensions before the Normal Minimum Pension Age (NMPA) is generally restricted, but a Protected Retirement Age may sometimes apply in careers like the military or professional sports.

The NMPA is defined by UK government legislation, which has held that minimum at 55 years of age since 2010, although it’s due to rise to 57 from 2028. 

That same legislation allows members of some specific pension schemes to access their pensions at an earlier age, known as a Protected Retirement Age. Some examples of pension schemes with a Protected Retirement Age include the Armed Forces Pension Scheme, the Firefighters’ Pension Scheme, and the Police Pension Scheme. 

You can learn more about pension laws in the UK in our guide: Pension laws in the UK

What are your pension withdrawal options?

If you decide to withdraw some or all of your pension then there are several options to consider, including lump-sums, drawdown and annuities, but there is no obligation to do anything until you’re ready. 

Let’s break down each of these options in more detail. 

How does the 25% tax free pension lump sum work?

If you’ve decided the time is right to withdraw funds from your pension pot (and assuming you’re the right age to access your specific pension scheme) then you can typically withdraw 25% of your total pension pot tax-free, up to a limit of £268,275. 

While it can sometimes vary a little from one provider to the next, in most cases you should be given the option to either withdraw all 25% in one lump sum or opt instead for phased withdrawals, where you would take out smaller amounts here and there; up to the value of 25% of your fund total.   

Want flexible income? Here’s how pension drawdown works

“Pension drawdown” is the name pension providers use for a flexible approach to your retirement income, and will usually see you withdraw the 25% tax-free lump sum and leave the rest of your pension pot invested to allow it to continue to grow. 

With this option you’ll then be able to “draw down” additional sums from your pension pot as and when you need it.

Unlike annuities, which offer a consistent, fixed retirement income each month, drawdown is often used to complement other sources of income and only taken when it’s needed. 

A word of caution though: since pension drawdowns allow you to set your own withdrawal amounts and frequency, there is a risk that you might accidentally take too much out of your pension pot too soon, which could then leave you short in later years.

Once your pot is in drawdown it is said to be crystallised. If at this point you decide to change providers then you’ll have to transfer your full pot, it can’t now be done in chunks. However, if a portion of your pension remains uncrystallised (ie not in drawdown) then this money will continue to be invested and, as such, can still be moved, in parts or as a one-off, to other providers.

Want a guaranteed retirement income? Annuities explained

In contrast to Pension Drawdown, a Pension Annuity is designed to offer you a regular, guaranteed monthly amount of retirement income for the rest of your life. 

In that sense it’s less flexible than Drawdown, and it also means your pension pot won’t have the potential to grow, since it will no longer be invested (with the exception of variable annuities, which we’ll go into in more detail later).

The trade off for the reduced flexibility you get with a Pension Annuity is that it eliminates the risk that you might inadvertently leave yourself short in later years by withdrawing too much from your pension pot today.

Similar to life insurance, Annuities are calculated based on your personal circumstances, health and living situation (basically your risk) and different providers have different scoring criteria. 

You’ll pay income tax on your Annuity income and, because no one knows how long you’ll live, you may ultimately receive less than you paid into your pension pot; although Annuities do often come with inbuilt death benefits. 

There are several types of Annuities:

• Lifetime Annuities are guaranteed for the rest of your life, and the amount doesn’t increase even when inflation does.
• Fixed-term Annuities last for a specified period, maybe 5, 10, or 25 years.
• Escalating Annuities are a catch-all term for annuities which increase by an agreed percentage each year, or in line with inflation. 
• Variable Annuities are generally linked to an investment index or fund, with your retirement income rising or falling in line with that fund’s performance. 

Can I take my whole pension out at once?

Although some providers don’t permit it, there’s no specific rule that says you can’t withdraw your entire pension pot in one go. But keep in mind that only the first 25% is tax-free (up to a limit of £268,275), with the rest taxable as earnings. Before making a major withdrawal it’s best to calculate your tax exposure.

Withdrawing your whole pension may be a suitable way forward if you have a limited life-expectancy (a chronic or terminal illness, for instance), or if you face major expenditure and would rather pay tax on your pension than interest on debt. 

Withdrawing your pension in full means that this money is no longer working for you and your future, so there's a risk that over time you’ll run short or even run out. Before deciding on this approach it would be sensible to speak to a financial adviser to help you weigh up all your options. 

Uncrystallised funds pension lump sum (UFPLS)

An Uncrystallised Funds Pension Lump Sum (UFPLS) is very similar to a regular pension drawdown, with the main difference being how you’re taxed.  

With drawdown, you first withdraw a tax-free lump sum, with the remaining balance of your pension pot moved to a drawdown account where those funds are invested and you’re able to draw down from them as and when required. Most people choose to take the full 25% tax-free lump sum when using Pension Drawdown, and move 75% into the Drawdown account. They’re then liable for income tax on any withdrawals from the Drawdown account. 

By contrast, UFPLS offers you a tax-free allowance on the first 25% of every withdrawal from your pension pot, rather than on the first 25% lump sum you withdraw. The upside is that this approach can spread out the tax-free allowance over the course of your retirement, but it does mean that you’ll have to pay income tax on 75% of each withdrawal, and this could potentially nudge you into a higher tax bracket. 

It’s also worth bearing in mind that if you’re still paying into your pension then taking your pension savings as UFPLS will trigger your Money Purchase Annual Allowance (MPAA), which is an annual limit on how much tax relief you can receive on payments into a Defined Contribution Pension after you’ve started accessing your pension. 

UFPLS can be a worthwhile option if you haven’t got a plan yet for how you’ll use, spend or invest your pension pot. This option doesn’t tie you into any major or long-lasting agreements, and you can spread your tax burden across different tax years. 

What are the key differences between withdrawing state pension vs private pension?

At what age can you access your pension? 

• The State Pension is accessible from state pension age, which is 66 today but is scheduled to rise to 67 by 2028. Early access to the State Pension is very rare but it can happen where there’s a serious health issue. You can also choose to defer taking your State Pension if you wish. 
• Private Pensions are accessible from age 55 today, rising to 57 by 2028, and in most cases you can specify when, how, how much and how often you withdraw funds.

How do the different types of pensions pay you?

• The State Pension is calculated based on the number of years you’ve contributed to National Insurance over your working life, known as your qualifying years, and you’ll need at least 10 qualifying years to get any amount of State Pension, and 35 qualifying years to get a full State Pension. The pension amount you qualify for will automatically be paid into your bank account, usually every four weeks.
• Private Pensions offer more choice and flexibility in how they pay. You can take funds as a regular monthly income, or in one lump sum, or as a series of staggered lump sums. You can look at Drawdown or Annuities or you can do nothing and keep paying in.

How much control do you have over pension withdrawals?

• The State Pension is largely fixed in terms of when it starts paying out, how much you get and how often it pays. There’s rarely any flexibility on the amount or the timing of payments. 
• Private Pensions once unlocked can offer full control over when you withdraw, how much you withdraw, how often you withdraw and by which means (annuity, drawdown, UFPLS, lump sum). You don't have to decide until you’re ready and you can keep contributing if you wish. 

How does tax work when I take money from my pension?

Pensions, including the State Pension, are classed as income and as such are subject to income tax. A major consideration when making withdrawals is how those withdrawals might affect your tax bill, especially where your pensions interact with other income. 

After you earn more than the standard tax-free personal allowance, which for most people is currently £12,570 per year, you’re charged income tax on any income you receive above this level, although there may be further rules, conditions and thresholds to be aware of.  

The personal allowance may be higher if you receive certain state benefits or lower if you’re a high earner.

How are state pensions taxed?

The State Pension is taxable income and although the full amount (£11,973) comes under the standard Personal Allowance (£12,570 per year), other income sources such as a job, sideline, Private Pension, taxable state benefits and earnings from investments could quickly pull you over the threshold. 

The State Pension isn’t taxed at source, as it would be in an employer / employee relationship, so recipients are responsible for their own bills. If income from a job or Private Pension pulls you over the Personal Allowance then your employer or pension provider should pay tax for you based on your tax code. Self-employed people usually pay tax via self-assessment and in other cases HMRC may send a tax bill.

For example, if you receive £6,000 a year from your Private Pension and £11,000 from the State Pension, your Private Pension provider will usually pay any tax you owe on the total amount; which is £16,000 with around £3,430 of that total being taxable. 

How are Private Pensions taxed?

25% of your Private Pension can usually be withdrawn in one or more tax-free lump sum(s) before funds are taxable in-line with standard UK income tax bands.

Lump sums 

• Big withdrawals could push you into a higher band of income tax so you may want to spread withdrawals out into different tax years.
• If you take your pension as one or more lump sums you may go onto an emergency (higher) tax code which will initially deduct more tax than you owe. You should be able to correct this via HMRC.
• Once withdrawn, any growth in the value of your pension savings is taxable whereas growth inside the pot is tax-free.

Most people withdraw their 25% tax-free lump sum before deciding how to draw down or use their remaining pension funds, and tax can be an important factor in that decision. By choosing to draw down on your pension in a regular and consistent way, or by buying an annuity, you'll keep your tax bill more stable each year. 

Note that income you get from some savings and investments is tax-free under the Personal Savings Allowance (PSA) and each tax year you can earn: 

• £1,000 tax-free if you’re a basic-rate taxpayer 
• £500 tax-free if you’re a higher-rate taxpayer 
• £0 if you’re an additional-rate taxpayer

You can learn more about pension tax in the UK in our guide: Pension and tax: Everything you need to know

How much should you withdraw from your pension and when?

How much to withdraw, and when, is a big decision that can have implications for both the tax you pay and your future retirement income, so you’ll probably want to factor in your expenses, plans, health and even life expectancy as well as the size of your pot. It’s also a good idea to factor inflation into your calculations because money loses buying power over time.

To ensure you don’t run out of money it’s sensible to plan for consistent and affordable withdrawals; keeping roughly similar amounts of money at regular intervals and drawing up a budget on that basis. You may be used to operating on a consistent monthly salary so why not draw your pension that way?

The so-called “4% rule” recommends that you should withdraw 4% of your portfolio's value each year, adjusting for inflation each time. This can be a helpful guide, but it’s also fair to say that while inflation increases the cost of goods and services, many people find that their travel and social life expenditure reduce as time passes anyway. 

Example

James retires at 67 on full State Pension (£11,973) and a Private Pension pot of £200,000. He decides to withdraw the first 25% of this Private Pension (£50,000) as a tax-free lump sum and spend it on travel, home improvements and a new car, leaving £150,000 in the pot. 

Since James is currently in good health, he decides that 20 years is a decent estimate for his life expectancy and so £150,000 divided by 20 is £7,500 per year.

His State Pension plus Private Pension would therefore equate to an annual income of £19,473, with roughly £7,000 of that amount subject to income tax at the basic rate. 

To keep some in reserve, adjust for inflation, and lower his tax bill, James decides to instead draw down £6,500 from his Private Pension per year, giving a total annual retirement income of £18,473. 

Interestingly, using the “4% rule” that we mentioned before would equate to an annual pension withdrawal of £6,000 in the first year, which is a remarkably similar figure.

Pension withdrawals in your 50s, 60s and beyond

Pension withdrawals in your 50s

Your Private Pension is unlocked at 55-years-old, increasing to 57 by 2028, meaning you can access a little or a lot of the funds you've built up from that point. But before making significant withdrawals, which risk you running out, it’s worth thinking through your plans for work.

If you’re still working and reasonably happy with that then you can keep doing so, and delay taking your pension. Not only would you keep your fund intact but you could carry on contributing too.

You could also explore phased retirement to dial up your free time but with a job and salary still in place. Some people look at this as using work to fund retirement, while still building more pension savings for later. 

Pension withdrawals in your 60s

People often begin drawing from their Private Pensions in their 60s, as it marries up with the state pension age and the average age (~64) at which people currently stop working. 

In many cases people withdraw the first 25% of their pension pot as a tax-free lump sum, with plans to use the balance more strategically, which can be done, for example, by purchasing an annuity (a guaranteed income) or via drawdown (taking out sums as and when required), but the key is to balance life costs without overshooting and running your fund down too much or too soon.

Pension withdrawals in your 70s and 80s

In your 70s and 80s newer pension priorities emerge in that you may want to plan for your later-life-care fund as well as your estate planning. 

At this stage in life it’s not uncommon to move from a drawdown strategy to the security of an Annuity (buying a guaranteed income), not least because Annuities generally offer attractive death benefits which can feed into your estate planning.

Gender considerations in pension withdrawals

On average, women in the UK today retire on pension savings of £69,000, versus an average pension pot of £205,000 for men, with the gender pay gap and career-breaks playing big parts in that discrepancy. Women also typically live longer, meaning the smaller pots may have to last longer. 

This is useful information to factor into a withdrawal or drawdown strategy, as running out of pension funds too soon is a very real risk; especially when the pot is smaller to begin with. 

It’s also worth looking into Joint-life Annuities, which invite couples to purchase a guaranteed joint income for life, with additional safety built in should one partner survive the other. 

What are some common pension withdrawal mistakes to avoid?

Common mistakes regarding pension withdrawals include:

• Taking out too much too early, which risks leaving you short on retirement income in later years
• Failing to account for tax
• Assuming pension investments are stable and reliable

Some people over rely on their State Pension, both in the terms of the amount they’re entitled to and how far that money will go in real terms. Planning a fund to cover later-life care costs is another area that people often overlook, as many of us assume it won’t happen to us.

If you’ve bounced between jobs and aren’t sure what pensions you have, you’re not alone. Many people are in the same boat. It’s never too late to start sorting it out, and tools like the Pension Tracing Service can help you find what’s missing.

Tools and support for planning your pension withdrawals

If you’d like some support with planning your pension withdrawals, there are plenty of online tools, resources and calculators that can help you glean information and even run your numbers. Services such as Money Helper, which is backed by the government, offer free one-to-one consultations, while a financial adviser is always a good port-of-call for advice and strategies tailored around your circumstances.  

Pension withdrawals frequently asked questions

Can I take money from my pension and still work?

Yes, you can access your pension while continuing to work. That said, after the first 25% your withdrawals will count as income and may push you into a higher tax bracket, so be sure to check your income tax exposure before making withdrawals.

What happens if I die before using my pension?

Most Private Pensions will allow you to name a beneficiary who stands to inherit your pension in the event of your death.

Can I move between drawdown and annuity?

You can easily move from drawdown to annuity but aside from a brief cooling-off period, backing out of an annuity isn’t possible. 

What if I want to change my withdrawal plan?

You’re fully entitled to do so. Your pension withdrawal strategy is up to you, but taking advice from a financial adviser is generally a good idea when changing your approach to withdrawals. 

Can I take money from my pension at 30?

Pension withdrawals at age 30 are only permitted in very rare cases, such as terminal illness or severe ill health, and require formal approval from your pension provider. 

Can I withdraw my pension at 55?

As of now, yes - the current age of access for private pensions is currently 55, but this minimum age will increase to 57 in 2028 so it does depend on what age you are now.

Can I use my pension to pay off debt?

Yes, provided you meet the minimum age to access your pension then you can use pension withdrawals to pay off debt. However,  it’s important to be aware of the potential tax implications of withdrawals, as well as the long-term impact on your retirement income if you withdraw a large proportion of your pension funds.