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Can I withdraw my pension before turning 55?

With so many people asking, “Can I withdraw my pension before turning 55,” we thought we would address this in an article to help inform readers about the rules regarding pension release, taxation, and when and how much you can withdraw.

Please note that Moneyfarm does not offer this service. While we strive to provide comprehensive retirement planning services, facilitating early withdrawals from pensions is outside the scope of our services.

With so many people, “Can I withdraw my pension before turning 55,” we thought it was about time that someone came up with a definitive answer. We, therefore, decided to publish this article to advise readers about the rules regarding pension release, taxation, and when and how much you can withdraw.

Can I withdraw my pension before 55?No, only in exceptional circumstances
Can I transfer my pension?Yes, some pensions can be transferred, however, you need to be careful not to lose protected benefits or guarantees. We suggest talking to one of our Investment Consultants if you need some guidance.
Is there a limit?No, but if you withdraw more than 25% of your pension savings, you will have to pay income tax.  However there may be exceptions to this if you have protected tax free cash.
Can I work while drawing my pension fund?Yes, and many people do.

Before we get into the pension nitty-gritty, let’s remind ourselves that if you have a private or workplace pension, you can start taking money from it at the age of 55  (due to change to 57 from 2028). At present, you are entitled to a 25% tax-free lump sum.

One of the pension options open to you is aiming to have enough set aside for an earlier than state retirement age. Also, here are some tips and advice on how to retire at 55.

Trying to take your pension before you turn 55

Pensions are specifically created as a long term investment vehicle, allowing you to save towards retirement, with additional top-up contributions from the government, meaning your investments are boosted by 25% (or more if you pay a higher rate of tax). These tax-efficient wrappers, mean you will have more than just the state pension to live on when you choose to stop working. 

Whilst the state pension will not be available to you until you reach state pension age currently 66, but  rising to 67 in 2028, modern private pensions allow you to access your money from the age of 55 (rising to 57 in 2028) allowing you to retire earlier should you wish to.

The caveat here is that there are still older pensions that may have specific guarantees or benefits that apply from a specific point in time, and defined benefit schemes (also known as final salary schemes) that will have specific rules applied to them

Can you take money out of your pension before 55 if it’s a private scheme? – In a nutshell, no. There are exceptional circumstances where you may be able to access your pension before you’re 55, due to very ill health, or when life expectancy is under 12 months, but these are exceptions and it will still be up to the pension provider to approve any requests. 

You may see or be contacted by unregulated companies that will offer to help you access your pension before the age of 55. These companies are most likely to be pension scams and you risk losing all or most of your pension savings rather than getting hold of your money early. Remember, if it sounds too good to be true it most likely is. A regulated pension provider will not allow you to withdraw your pension before you reach the set age.

Can I cash frozen pensions from old employers?

Under the Pensions Act of 1998, employers automatically enroll you in a workplace pension scheme.

It means that you might accumulate several pension pots throughout your working lifetime. You might ask yourself, can I withdraw my workplace pension from a previous employer, and the answer is the same as above. Only in exceptional circumstances.. However, you do have other options.

Tranferring a pension

The more pensions you have, the more difficult it is to keep track of them, so you might want to think about a pension transfer. Before you wonder, “Can I withdraw my pension before 55?” you need to find all your pension accounts.If you have lost track of any of your pensions, you can try using the government’s pension tracing service. If you can find what you’re looking for, check whether the pension in question is a defined benefit or contribution pension before attempting to transfer anything.

If it is a defined contribution benefit scheme, it may have unique benefits, so do your research before you act or seek professional financial advice.

If you are going to transfer pensions for amalgamation purposes, you’ll find some helpful advice on the Gov.UK website.

What to consider before asking can I withdraw my private pension before 55

Before asking yourself about withdrawing money from your pension, you need to review your retirement planning. Taking money out of pension funds early will significantly affect the amount you will be due when you retire.

Withdrawing money from your pension at 55

As stated earlier, the answer to how much can I take from my pension at 55 is generally 25% of your pension savings without having to pay tax. Of course, you can take out more, but you will have to pay income tax on anything above 25% under the normal income tax band rates.

You must contact your pension provider if you want to take advantage of the age 55 tax-free sum you are entitled to. They will send you the appropriate forms to complete.

Continuing to work while drawing your pension

Taking 25% personal pensions cash from your pension when you turn 55 is only an option, it is not obligatory. If you are reasonably well off, you can defer the age you receive a private pension, and some people do. The Choices open to you are:

  • Withdraw a part lump sum and leave the balance where it is.
  • Turn your pension savings into an annuity
  • Continue to work and leave your pension untouched

We touched on the topic of cashing in a pension at 55 or earlier, but what about continuing to work while drawing your pension fund?? Is it even possible?

The answer is, yes, you can. It is wholly possible, and many people do so. There is no longer a defined default date when you are expected to retire. It is down to the individual, the companies and their business ethics and practices. So you can continue to work after you’ve reached the state pension age if you wish and your company agrees.

You can cash out a pension or receive your state and private pension while you continue to work, but there are advantages and disadvantages. The advantage is that once you reach state pension age, you no longer have to pay National Insurance. The disadvantage is that all your income, wages, and pension are totaled to determine which band of tax you fall into.

Dealing with a pension deficit

Before we finish off this article on “can I draw my pension before 55,” let’s briefly discuss what to do if you have a pension deficit.

As far as your state pension is concerned, in order to receive your full pension, you must have paid sufficient National Insurance contributions. You might have a pension shortfall if there are gaps in your contributions over the years. You can check your state pension status by using the government NI record checker

You can make up the shortfall if you so wish and the government NI checker will tell you how much shortfall you owe for each year that is not full. Be aware though, there are limits as to how far back you can go to top up. Knowing how much you will need in your pension for your retirement years is difficult to predict, but plenty of helpful advice is available. For example, there is an informative article about what sort of pension you are likely to need and how to avoid a pension deficit on the Moneyfarm website.

Impact on Future Retirement: The Effects of Withdrawing Your Pension Early

It’s important to consider the long-term implications when asking, “Can I withdraw my pension before 55?”. While it may seem appealing in the short term, if at all possible, it can significantly reduce your pension amount in the future, potentially leaving you with insufficient funds to live on during retirement.

The early withdrawal of pension funds, often referred to as a pension drawdown, means you start dipping into your pension pot before its time. It’s like opening the oven before your cake is fully baked, and the result is a lot less appetising. The more money you take out of your pension pot now, the less you will have when you retire. Compound interest plays a crucial role here – the longer your money is invested, the more opportunity it has to grow.

Another point to note is that if you’re considering cashing in small pension pots this could drain your pension resources quicker than you expect. These small pots might seem insignificant now, but they can add up to a considerable sum by the time you hit your retirement age. You may want to consider different options, like consolidating these small pots into a single pension pot to maximise the benefits.

Considering all these factors, one might be left questioning, “Can I withdraw my pension early?” or “Can you withdraw money from my pension?” without jeopardising your retirement. You can find comprehensive insights into how to retire early in the UK while securing your financial future here.

Finally, it is crucial to familiarise oneself with the rules and regulations governing pensions in the UK. For more information, please visit the UK government’s pension page or check the Wikipedia page on pensions in the United Kingdom. Remember, taking the step to withdraw your pension before 55 is a significant decision. Consider all the facts, seek advice, and make a choice that ensures your financial security in the long run.

Final thoughts

Making sure you have enough money to draw on in your retirement years is critical. You need to be aware of your pension options and seek professional financial advice.

If you’d like to find out more about pensions, the pension guide on the Moneyfarm website provides excellent additional information.

FAQ

Can I cash in my private pension before 55?

Typically, you can not withdraw from your pension before the age of 55. But, withdrawal exceptions depend on your health and pension scheme. For example, terminally ill individuals with a life expectancy of less than a year may withdraw from their pension before age 55. Also, early retirement due to poor health may enable you to qualify for an ‘ill-health’ pension which allows you access to your pension before age 55. Otherwise, unauthorised payments before age 55 come with high tax implications, most pension schemes will not let you take such an action and any companies that claim to help you to do so, are likely to be scammers.

Can you withdraw money from a private pension early?

The earliest you can withdraw from a private pension without a penalty is at age 55 (57 from 2028).

Can I take a lump sum from my pension before 55?

No. Only in exceptional circumstances.

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*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.