Can I retire and take money out of my pension early?

“A pension is what you live off when you stop working.”

“You need a pension for your retirement.”

You may have heard these statements before, and they are both true and false. A pension is actually a long-term savings vehicle with tax incentives. It isn’t necessary to have one to retire, and you can live off any other money you have whether that’s from savings, equity release or cash under your mattress.

It’s true to say that a pension is a traditional way to receive an income when you retire, by either removing money directly from the fund or selling it for an income for life. However, in reality it is a savings account that offers tax relief in exchange for restrictions when you can access it – usually from the age of 55.

You won’t be locked into work

There are some types of workplace pension that have certain restrictions, including a set retirement date from when an income can be taken. Generally, though, new schemes do not have these restrictions and, as a result of the new pension rules, from the age of 55 people can take money from them flexibly.

A potential point of confusion is that there can be different age limits. Remember it like this:

  • The state pension age is currently 65 for men and increasing to 65 for women, but this has no impact on when a person can actually retire
  • If you can afford it, you could retire in your 20s or never start working at all
  • Private pensions can legally be accessed from the age of 55, but individual schemes may have a specific retirement date

So if you ask “Can I take money out of my pension early?” then the answer is yes, as long as you are at least 55 years old and in a scheme that allows withdrawals.

If your scheme doesn’t allow withdrawals then a pension transfer can move you to one that does, although this may mean sacrificing certain benefits and may not be an appropriate decision for your circumstances so financial advice should be taken before making a decision.

Tax benefits of pensions

When it comes to savings, you have a range of options including savings accounts and ISAs – so why choose a pension?

One of the main reasons is the significant tax advantages they offer, although it’s advisable to also have other savings accounts including ISAs so your money is not in a single pot.

If you are a basic-rate taxpayer in a workplace scheme with an employer match, for every £80 you contribute your fund will grow by £200*. Higher and additional rate taxpayers can claim a further 20% or 25% tax relief, respectively, from HMRC in their self-assessment. The following graph demonstrates how this works:


You can access your pension without retiring

Although the primary purpose of a pension is to provide an income in retirement, it’s possible to withdraw money from it before you leave the workplace. Up to 25% can be taken as tax-free cash, so if you had a £200,000 fund you could withdraw £50,000 with no tax penalty (from the age of 55, of course). The rest can also be accessed but is considered taxable, so is added to your other income for the year and may result in a high tax bill.

This money can be used however you wish, whether that’s clearing your mortgage, paying for your daughter’s wedding or carrying out home repairs so you won’t have to do it in retirement.

Have you released money from your pension? Let us know with a comment below.

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Important information

*Tax treatment depends on individual circumstance and may be subject to change in the future

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:\

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