Can I Withdraw Money from My Pension Plan

Can I Withdraw Money from My Pension Plan?

If you have built up savings in a pension plan, you may be wondering when and how you can withdraw money. While pensions are designed to provide income in retirement, there are rules around when you can access your funds, how much you can take, and what tax might be due.

This article explains whether you can withdraw money from your pension plan, what the options are, and what you need to be aware of before making any decisions.

When can you withdraw money from your pension?

In most cases, you can start withdrawing money from your defined contribution pension from age 55. This includes personal pensions, workplace pensions, and self-invested personal pensions (SIPPs). The minimum age will rise to 57 in April 2028.

If you have a defined benefit pension (such as a final salary scheme), you will usually need to wait until the scheme's normal pension age, which is often 60 or 65, although you may be able to take your benefits earlier with a reduction.

You cannot normally access your State Pension until you reach State Pension age. You also cannot withdraw it as a lump sum.

How can you withdraw money from a defined contribution pension?

If you are aged 55 or over, there are several ways to withdraw money from a defined contribution pension:

1. Take a lump sum

You can take some or all of your pension as a lump sum. The first 25 percent is usually tax free, and the remaining 75 percent is taxed as income.

You can take a single lump sum or a series of lump sums over time.

2. Drawdown

You can move your pension into flexi-access drawdown, which allows you to keep your pension invested and withdraw money as needed. You can still take 25 percent of the fund tax free at the point you move money into drawdown.

3. Buy an annuity

You can use your pension pot to buy an annuity, which provides a guaranteed income for life or for a fixed period. You can still take 25 percent of your pot as a tax-free lump sum before purchasing the annuity.

4. Use small pot rules

If you have a small pension worth less than £10,000, you may be able to take the whole amount as a lump sum, with 25 percent tax free and the rest taxed as income.

Can you withdraw money before age 55?

In general, no. Withdrawing money from a pension before age 55 is not allowed unless you:

• Are seriously ill or terminally ill

• Are in a scheme with protected early access

• Have a court order that permits early access

If someone offers to help you access your pension before age 55 for any other reason, it is likely to be a scam. Taking your pension early without proper authorisation can result in a 55 percent tax charge plus additional penalties.

What tax will you pay?

The first 25 percent of your pension is usually tax free. The rest is taxed as income, based on your total earnings for the tax year.

This means a large pension withdrawal could push you into a higher tax bracket. You can manage your tax bill by spreading withdrawals across different tax years.

Can you continue paying into your pension after withdrawing money?

Yes, but be aware of the Money Purchase Annual Allowance (MPAA). Once you start taking money from your pension, your annual tax-free contribution limit may fall from £60,000 to £10,000. This limit includes both your contributions and those from your employer.

Things to consider before withdrawing money

• Do you need the money now, or can you leave it invested to grow?

• Will taking money now reduce your retirement income later?

• What tax will you pay if you withdraw a large amount?

• Will you trigger the MPAA, reducing your ability to save in future?

If you are unsure, speak to a regulated financial adviser or use the free Pension Wise service provided by MoneyHelper.

Final thoughts

You can withdraw money from your pension plan from age 55, with flexible options for lump sums, drawdown, or annuities. The first 25 percent of your withdrawal is usually tax free, with the remainder taxed as income.

Accessing your pension is a significant financial decision. Consider the tax implications, long-term impact, and contribution limits before taking any money. Proper planning can help you get the most out of your retirement savings.