Financial Mortgage Advice

Can I take my pension at 55 and still work?

Yes, you can take your pension at 55 and still work.  There is no set state retirement age these days and you are able to continue to work for as long as you like.  You are currently able to access a private pension in the UK from age 55 (rising to 57 in 2028).

There are lots of reasons why you might want to access your pension savings before you stop working.  It is even possible to continue paying into your pension once you have begun to take money from your pension pot.

There are some things to consider though before you decide if taking a pension whilst still working is right for you. If in doubt please get in touch with a financial adviser to make sure you are making the right decisions.

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Why take a pension at 55 and still work?

Ever since pensions changed back in 2015 there is a question that keeps popping up: can I take money from my pension pot and still work?  And can I also keep paying into it?

There are many reasons why you might want to take a pension at 55 yet still continue to work. You might want to reduce your work hours, take that holiday of a lifetime, pay off a chunk of your mortgage, or help support your children through school or university.

If funds are released in a tax efficient way then it can help improve your finances, espe????

When can I start to take my pension?

You can usually begin to access your personal pension savings at any point between 55 and 75, although this is due to rise from 55 to 57 from 2028.  And you can usually get 25% of your pension pot tax free.  So for example if your pension pot is valued at £100,000 then you can withdraw £25,000 tax free.

You can take your tax-free cash as a single lump sum, or in several stages (if your pension provider allows it).  It’s advisable to check with your pension provider to see if they let you do this, as not all providers do.
Anything above the tax free amount is taxable, and you pay income tax on it just like any other income you would receive. There are a variety of options when taking your pension money out, ways that a

Continuing to contribute can be a good idea.

Paying into a pension is usually a good idea and this doesn’t necessarily stop being true at 55.
If you are in a workplace pension then its likely your employer makes a contribution as well, which is a valuable benefit you don’t want to miss out on. And of course there are the significant tax incentives in place to encourage people to pay into a pension, these tax benefits can help make your pension pot very tax efficient.

How much can I lose if I take my Pension at 55?

If you have a defined contribution style personal or workplace pension then you can usually start to access and withdraw from your pension from the age of 55.  This is due to rise to age 57 by 2028.

If you have a defined benefit (DB) pension then it will depend on the scheme rules but it is usually 60 or 65.  However, many DB schemes allow you to access a pension payment earlier or later than the normal pension age.  It may be possible to start to receive a pension at age 55, although the income you get is likely to be reduced, as you’re taking it earlier than the normal pension age of the scheme.  Each scheme will have a reduction factor to work out how much you will receive if you decide to take your pension early.  This is because they will be paying your pension for longer than originally agreed.

Conversely, if you accessed your pension later then you could get a higher income.  This is because you will be claiming the pension income for a shorter amount of time.  Again, this will need to be checked with your pension scheme administrator.

Can I take my state pension early?

The earliest that you can get your State Pension is when you reach your State Pension age. You’ll have to wait to claim your state pension if you retire before you reach that age.  The State Pension age is currently 65 and is due to rise to 67 by 2028.

It is possible to defer your state pension and receive a higher pension amount as a result. If you are reaching state pension on or after 6 April 2016 then you will currently receive an additional 1% increase for every 9 weeks you defer, working out to just under 5.8% for each year.  You must defer for at least 9 weeks to receive an increase.

Whether it is beneficial to defer or not will depend on your individual situation.  More information on deferring the state pension can be found on the UK government state pension site.

 

Phase your retirement

It’s a good idea to talk to a pension adviser about the best way to access your pension. As everyone’s situation is unique, there is no set best way to take your pension so you will need to run through your options to work out the best way.
Yet if you are likely to be receiving other forms of income for a while (such as salary, rent from BTL properties etc) then it may be a good idea to vary your income based on changing needs. If this is the case then it might mean that drawdown is a suitable solution for your situation. But its always a good idea to discuss with a financial adviser before you decide on the best course of action.

Apart from the financial considerations, phasing into your retirement early can be better for your physical and mental health. There is less of a shock from going from a working life into full retirement, as sudden major lifetime changes can be stressful such as the shift away from a structured working environment.
Stepping into retirement bit by bit also gives you a bit of time to work out what your eventual full retirement might look like. By experiencing a partial retirement can give you some valuable insight about what is to come and give you the time and knowledge to prepare for your full retirement.

Is there a limit to how much I can contribute to my pension?

There is an Annual Allowance that can limit how much you can contribute into your pension plan. The Annual Allowance is the total amount that can be paid in to your pension plans in a tax year and includes all contributions from you, your employer or any other third party, and still receive tax relief. The limit is currently the same as the amount you earn in a year or £40,000 – whichever is the lowest.  The Allowance covers contribution to all pensions combined for that year.

If you begin to take your pension income in a certain way then you could trigger a reduction in your Annual Allowance down to £4,000 p.a. for all defined contribution schemes you’re in, and £36,000 for all defined benefit schemes.  This lower £4,000 limit is called the Money Purchase Annual Allowance.

There are consequences of exceeding your Annual Allowance, not only will you not receive any tax relief on the excess but you will also be liable for a punitive tax charge – the Annual Allowance Charge.

The Lifetime Allowance is a limit on how much you can have into your pensions before you start to incur a charge.  The lifetime allowance is currently £1,073,100 for the 2021/22 tax year.

Final Thoughts

There are some great upsides but also some potential pitfalls when deciding to access your penion whilst still working.

 

 

There are some potential pitfalls to accessing your pension whilst still working, mainly the risk of paying more tax than you need to or reducing the amount of annual allowance you have.

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