In their most basic form, pensions are a type of savings fund that provides for us later in life.
While pensions are typically for when we stop working, it’s common to start drawing money from a pension while continuing to work.
The minimum retirement age in the UK is 55 but is due to rise to 57 by 2028.
Defined benefit or final salary pensions are slightly different and depend on what your employer can offer you regarding early retirement in your unique circumstances.
Drawing a pension at 55 allows people to reduce their working hours whilst topping up their income from their pension. Withdrawing money to invest in a small self-employed business is another popular option.
Let’s answer the question “can I take my pension at 55 and still work” in detail.
When can I access my pension?
The minimum retirement age in the UK is 55 and is due to rise to 57 by April 8th 2028.
There are currently very few individuals in the UK who can take a pension before 55.
Before April 6th 2006, also known as ‘A-day’ in the pension industry, certain professionals part of protected pension schemes were permitted to take some of their pension earlier than 55, as early as 35 in the case of professional footballers.
Protected pensions schemes mostly covered sports professionals, e.g. professional athletes, sportspeople, gymnasts and other professions subject to occupational hazards or other physical barriers to working in later life.
So long as any of these professionals held a pension in a protected scheme before A-day, they usually retain the unqualified right to take some or all of their pension before the minimum national retirement age.
At the time, representatives from sports industries vehemently lobbied against this, arguing that some professional sportspeople would have to pick up a new job if they were forced into early retirement by injury or burnout.
The rules have generally been viewed as successful, preventing those part of protected pension schemes from drawing their pensions before retirement and blowing all the cash before they need it.
For most, A-day means nearly everyone in the UK is subject to the same minimum retirement age of 55.
If you are ill or unable to work
Taking money from your pension before the age of 55 is not currently illegal, and it is possible with the use of third-party services that offer to ‘unlock’ your pension.
Most services that offer this are scams and ought to be treated with extreme caution. There are numerous news articles on ‘unlocking schemes’, which essentially transfer your legitimate pension into a new pension scheme typically based outside of the UK.
This may be tempting for those facing financial difficulty. Being in debt or another problematic financial situation while you have a sizable pension pot sitting there seemingly untouchable is frustrating.
However, these so-called ‘unlocking schemes’ should be treated with caution as they charge exorbitant fees and are not governed by the Financial Conduct Authority.
Another consideration is that HMRC will treat any payment made this way as an ‘unauthorised payment’, and you could be hit with a 55% tax bill.
In short, then, the vast majority of individuals in the UK should not think about drawing their pension until the age of 55.
At the age of 55, you’ll have several legitimate options for drawing from your pension.
Drawing your pension at 55
Virtually all private pensions allow you to draw some or all of your pension at 55.
Some private pensions may incur charges for early withdrawals, but this is rare. You should always check with your private pension provider if you feel early retirement is an option for you or otherwise have an incline that you’ll take money from your pot at 55.
Drawing some or all of your pension at 55 allows you to scale back your work while still taking your pension to top up your income.
Some employers might allow you to scale back your hours without affecting your salary, especially in jobs with high occupational risk, like being a member of the armed forces.
Drawing from your pension whilst working is known as ‘phased retirement’.
Why draw your pension at 55?
Drawing some or all of your pension at 55 allows you to pay off your mortgage, start or support a business venture, or go on a long holiday.
If you’re able to withdraw your pension at 55, you’ll have several options for doing so:
Draw a 25% lump sum
The first 25% we draw from our pensions is tax-free.
Many people choose to draw this 25% tax-free sum as soon as they can after turning 55. It’s an excellent way of paying off various debts, going on holiday, or clearing the mortgage.
The 25% sum will not contribute to your yearly income tax, hence why withdrawing the first 25% of your pension as cash is tax-efficient regardless of when you withdraw it.
Draw more than 25%
You can draw more than 25% of your pension pot. You can even draw the entire thing if you want to!
If you choose to draw more than 25%, you’ll pay zero tax on the first 25%, and the remainder will be taxed as taxable income.
The tax you pay will depend on your earnings. As of 2021/2022, the current income tax bands are:
|Band||Taxable income||Tax rate|
|Personal Allowance||Up to £12,570||0%|
|Basic rate||£12,571 to £50,270||20%|
|Higher rate||£50,271 to £150,000||40%|
|Additional rate||over £150,000||45%|
For example, if you earn £10,000 as a sole-trader and take 50% of your £40,000 pension pot (£20,000), you won’t be taxed on the first 25% of your pension (£10,000) but will be taxed on the remaining £10,000.
Instead of your income that year being £10,000, it would be £20,000, and you’ll be taxed accordingly.
If you want to withdraw your pension pot at 55, then beware of losing value through tax.
The entire point of a pension is that it’s tax-efficient - paying unnecessary income tax on your pension withdrawals whilst you’re working erodes the purpose of the pension.
Buy an annuity
You may also have the opportunity to buy an annuity at age 55, providing you with a fixed income for life or a specified term. There are lots of different annuities with varying terms, options for couples and investment-linked annuities.
Your pension provider should tell you what annuity you can buy with your pension pot at the age of 55.
Annuities may or may not be optimal for tax purposes if you’re still working. A pension drawdown scheme (drawing sums from your pension when you want to) can be advantageous from a tax perspective compared to buying an annuity.
You’ll need to work out how much you can draw before incurring income tax that you could otherwise avoid by drawing slightly less.
On the other hand, an annuity is a safe option for preserving your pension until later life, whereas a drawdown puts the onus on you to save your pension.
When calculating how much pension you can draw without tilting over the income tax threshold, you’ll also have to factor in your State Pension which is also treated as earned income for tax purposes.
Taking defined benefit pensions early
You can take a defined benefit pension (also known as final salary pensions) early, but this depends on what your pension provider is willing to offer.
Often, your options for early retirement will depend on your employment record and duration.
Those with long periods of dedicated service to an employer may receive a favourable early retirement package.
The earlier you retire, the smaller your final salary pension payments may be (as you’re taking them over a more extended period).
Do I pay National Insurance contributions on my pension income?
According to the Pensions Advisory Service, you won’t pay NI contributions (NICs) on any payment received from a pension scheme, including an annuity. You’ll only be subject to income tax.
If you’re younger than State Retirement Age, you’ll still pay National Insurance on your income from employment and self-employment if you earn above the NIC threshold.
Once you reach the State Retirement Age, you stop paying NICs. You can show your employer proof of your age to prove that you no longer pay NICs once you reach State Retirement Age.
The advantages and disadvantages of withdrawing from your pension and still working
So what are the positives and negatives of taking some or all of your pension at 55 whilst still working?
Positive: You can take a 25% lump sum at the age of 55, allowing you to pay off debts, go on holiday or kick start a business, etc. You can then leave the rest of your pension invested for later life or use it to buy an annuity.
Positive: Drawing some or all of your pension at 55 allows you to scale back your working hours. This is known as ‘phased retirement’. You may be able to withdraw an advantageous sum that keeps your earnings below an income tax threshold.
Positive: You can draw some of your pension as a tax-free lump sum and then transfer the rest into a new pension or combine it with other workplace pensions into one longer-term pot.
Negative: Money removed from your pension pot is no longer invested. You’ll lose the benefit of investment by withdrawing cash at 55. This will leave you with a smaller pot accumulating lower overall growth than leaving your pot untouched.
Negative: If you work and draw from your pension, you run the risk of paying more income tax than if you’d left your pot alone. If you do withdraw more than your 25% tax-free sum, make sure to be aware of income tax.
Negative: The smaller your pot is earlier in life, the less you’ll have later in life. It’s easy to run down your pot by making seemingly small withdrawals. If you’re not recuperating that money in other savings or equity, you may whittle your pot down for when you’re truly unable to work.
Can I take my pension at 55 and still work?
You can take your pension at 55 and still work, and this is a popular option for many in the UK.
Many people want to avoid a hard stop to their working life and instead choose ‘phased retirement’ where they slowly scale back their working hours.
Taking some money from your pension pot is a great way to support your income from 55 to State Retirement Age, which will be at least 65.
The State Retirement Age has already begun to rise. For those retiring on or after October 2020, the State Retirement Age is 66 and will gradually rise to 67 and 68 for both men and women.
You have four main options for withdrawing money from your pension at 55:
- Taking a 25% tax-free lump sum and leaving the rest invested.
- Taking any % sum, up to 100% of your pension pot if you wish.
- Buying an annuity.
- Leaving your entire pension pot.
You can also mix-and-match options to your heart’s content. Just be aware of chiselling too much value from your pot and paying income tax on pension withdrawals.
Your withdrawals can push your income past tax thresholds. No one wants to pay more tax than they need to - especially not the over-55s who've probably paid enough already!