How much tax will I pay if I release my pension funds while still working?

With the introduction of the Pension Freedoms Act in 2015, you now have a range of options that allow you to flexibly access your pension pot from the age of 55. And you don’t have to be retired to access this money.

There are lots of reasons people decide to start accessing their pension money early. Some of the most common are:

  • Clearing off debts or a mortgage before retirement

  • Making essential home improvements

  • Topping up their income to reduce their working hours

So, what about tax?

The first 25% of your pension can be taken tax-free. Any further withdrawals are subject to income tax at your marginal rate. So, taking too much from your pension in one go could mean getting stung by a large tax bill.

What happens if I withdraw too much from my pension?

Keeping an eye on how much you withdraw from your pension is especially important if you’re still working because both your income from employment and any money you take from your pension will go towards your annual allowance. And exceeding this allowance will push you into a higher tax bracket.

How can a financial adviser help?

A financial adviser can help you work out how much you can release from your pension in any given year to stay within your annual tax allowance. This will ensure that you don’t exceed this allowance and end up facing a large bill.

Not only can they help you with tax, they can also help you explore what options are right for you when it comes to accessing your pension money from the age of 55.

What are my options at 55?

Since 2006, people have been able to take their tax-free lump sum from their pension from the age of 55. Now you have even more options available to you. As well as taking all or some of your tax-free cash, you can also:

  • Take more than your tax-free cash allowance as a lump sum

  • Start taking an income

  • Release your whole pension

Not every option is right for everyone so it’s a good idea to first take a look at your pension and consider both your current and your future needs to know what is right for you.

How do I know what option is right for me?

The reason that not every option is right for everyone is because taking too much from your pension too soon could leave you with less to live on later in life. That’s why it’s important to consider both your current and future needs, as well as your financial circumstances.

The best thing to do is to speak with a financial adviser. By asking them to check your pension, you can learn:

  • The current value of your pension

  • How to improve its performance to potentially leave you with more money when you come to retire

  • What options are best for you when accessing your savings

They can make sure that you don’t fall into any of the common pitfalls when releasing your money and ensure that you are keeping your future safe while doing so.

Thinking about your pension options?

Regulated and authorised by the FCA, we can help you to make the best possible decisions when it comes to your pensions.

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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.