Can I take my pension at 55 and still work?

Why take a pension at 55 and still work?

There are many reasons why you might want to take a pension at 55 yet still continue to work.

Many modern pension plans let you access your pension pot in a “flexible” manner –  this means that you can choose when and how much to withdraw from your pension when you reach the right age.

There is also the added benefit that almost all pensions allow you to withdraw 25% tax free, which is often taken as a lump sum (and often referred to as the tax free lump sum).

All of this gives you plenty of opportunities to use your pension pot in the right way for you – and you may decide to use some of that money now, rather than waiting for later life.

Reduce your working hours.  With the removal of a set retirement date we can work for as long as we want, but many do not want to go completely from a full time working life to one with no work at all.  Many chose to reduce their hours for a few years first, and use a small part of their pension pot to help support them with an income top-up.

Paying off debts – Many reach the later years of our lives with some significant debts hanging over our heads, often a mortgage.  Accessing your tax free lump sum at 55 is a common solution to rid yourself of the burden of your debts and save on those interest payments.  This approach doesn’t always make financial sense, however, and you need to be careful that the money would not be better served remaining in your pension and benefiting from some extra years of growth.

Help your loved ones – many people find that they spend the first part of their lives with not enough, then the latter part with more than they need.  You can access part of your pension before you need it yourself to use it to help your children put a deposit down for their house, or to support them through university.

Change career – many of us choose our jobs mainly or wholly based on salary; we would like to do something we enjoy more but we also need to earn enough to pay for our day-to-day life.  If you have enough in your pension that you can start to take enough to live on then you can start to think about starting that dream job that you used to be worried would never pay you enough to live on.

Start enjoying yourself while you still can – depending on when you are planning to retire, your health and even the ages of your children, you may want to take that holiday of your lifetime before you retire.  Accessing some of your tax-free cash could be a way of achieving this.  Rather than an additional expense to use your pension pot on, it is more about moving the holiday to a time when you could enjoy it more.

Please note that the above as suggestions, and when deciding on when to start taking your pension you need to be aware of the risk and consequences that it may have on the rest of your retirement and also your tax bill.

Whether you 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, the flexibility of modern pensions means that, as long as you plan carefully, you can use your pension to help you achieve your goals.

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, including cash lump sums and guaranteed incomes, and there are opportunities to manage your income in a tax-efficient way.

Workplace pensions will often have their own retirement age, set by the employer at the outset.  These vary wildly but are often higher than the private pension age.  However, many schemes allow you to start to draw your pension early, with an associated reduction in the pension amount (as it’s being paid for longer).

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 it’s 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 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.

The good news is that taking money out of your pension doesn’t stop you from putting any more in, and benefitting from the same tax breaks as before.  Care must be taken though, as the money in the pension needs to be accessed in a certain way to retain the ability to continue to contribute to your pension as before.

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 in 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 access 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 it’s 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 life 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. Experiencing a partial retirement can give you some valuable insight into 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 to your pension plan. The Annual Allowance is the total amount that can be paid into 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 (for the 2022/23 tax year).  The Allowance covers contributions 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 2022/23 tax year.

Final Thoughts

Ever since pension rules 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?

As you have seen there are several reasons why you might want to start taking your pension from 55 and keep working, although there are also some disadvantages and risks that also need to be weighed up.  Everyone’s situation is different; both their personal situation and goals but also what types of pensions they have.  What works for one person may not work for another.

Careful consideration must be given; not only if should you take your pension early, but also what would be the best way to take it early?  Making the wrong choice could result in getting less money, taking on more risk than you should, paying more tax or reducing the ability to pay into a pension again (which may be important if you want to keep working and contributing into a pension).

We recommend talking to a Regulated Independent Pension Advisor who can talk you through the options, help you decide if taking your pension early is the right thing and what is the best way to go about taking your pension at 55 and still continuing to work.

We are fully regulated and experienced and are always happy to chat through any situation.  If you would like to drop us a line we can arrange a complimentary session to discuss your needs and options,