When Can You Access Your Pension?
For most personal pensions which are money purchase or defined contribution pensions, you can access the funds from the normal minimum pension age which is currently 55. This age is increasing to 57 from April 2028. The only time pension benefits can be taken earlier than the normal minimum pension age is where the member meets the ill-health or serious ill-health conditions or has a protected pension age. Any pension payment taken before age 55 that doesn't meet these conditions will be treated as an unauthorised payment and will incur a huge tax penalty of 55%.
A money purchase or defined contribution pension is a pot for your retirement where the value of the pot depends on how much has been put into the pot, the ongoing charges and the performance of the investments. Most workplace pensions are money purchase/defined contribution pensions.
There are also defined benefit pensions, which pay a guaranteed income for life at the normal pension age of the scheme. This is usually either 60, 65 or State Pension age but It could be different, depending on the scheme's rules. You may be able to start receiving an income from a defined benefit scheme at age 55 but the income you receive is likely to be reduced, as you're taking it earlier than the normal pension age of the scheme. It is important to understand what benefits you are entitled to in your defined benefit scheme and when they come into payment, as well as any early or late retirement factors that apply should you take your pension before or after the normal pension age of the scheme. Seeking professional advice will help you understand the impact of taking your benefits before or after the normal pension age of the scheme.
Some pensions which have guarantees attached, such as a guaranteed annuity rate or guaranteed minimum pension, will have a set retirement age such as 60 or 65. It's important to check your paperwork to know the details of these plans and when you can access these benefits without losing the guarantees.
You don't have to be retired to access your pension. You may still be working when your defined benefit pension comes into payment and this income will be added to your earnings and the income above your Personal Allowance will be taxed as income tax. You don't pay National Insurance on your pension income and you also don't pay National Insurance on your earnings after you reach State Pension age - unless you’re self-employed and pay Class 4 contributions. You stop paying Class 4 contributions at the end of the tax year in which you reach State Pension age.
You may still be working and access some of the funds from your money purchase or defined contribution pensions. Remember that for these types of pensions, 25% of the pension is usually tax-free (unless you have protected tax-free cash) and the rest is taxed at your marginal rate of income tax. If you start taking taxable income from the pension then you may be impacted by the Money Purchase Annual Allowance (MPAA). This means the amount you can contribute into your pension and benefit from tax relief reduces to £4,000 per year.
Drawing money from your pension may erode the capital value of the underlying fund, especially if investment returns are insufficient to offset withdrawals. If you need advice on your pensions and options at retirement, please consult a qualified financial adviser. VouchedFor is a good site to find an adviser as all reviews are independently verified.
To listen to our podcast on this and other topics, please click here. For useful information and tips, please follow me on Instagram, Facebook and LinkedIn. Please also get in touch with any topics you wish for me to cover or any feedback you have, either on email or through social media. Your input would be greatly appreciated💛.