Withdrawing money out of your pension

The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.

Your pension is there to provide you with money during your retirement. For many people, knowing how to take money from their pension isn’t always clear, especially if it’s a private pension or an older workplace pension.

Pensions may differ in terms of how you can take money from them. This guide will look at what options you may have for taking money from your pension, as well as when you can withdraw money and considerations to be aware of.

When can I take money from my pension?

You can take money from a private pension, such as your workplace pension, from the age of 55 (rising to 57 from April 2028), in most circumstances. This is known as the normal minimum pension age (NMPA). State Pensions can be taken once you reach State Pension age, which will change based on the year you were born.

Some people may choose to take their pension as soon as they reach the NMPA, whereas others may wait. It’s a very personal decision, and one that shouldn’t be made in haste.

Withdrawing money from your pension can be done directly from your pension provider, although some people choose to take out a pension product, such as an annuity or a drawdown to make the most of the money they have.

What options do you have to take money out of your pension?

Arrangements like annuities or pension drawdown are options often used to withdraw money from a pension. However, there is also the option to deduct money from your pension as a lump sum.

1. Buy an annuity

Annuities are one of a few options you have for withdrawing money from your pension. An annuity provides a fixed income for either a set duration or for the remainder of your life. Annuities turn your retirement savings and pension into regular payments that you can use as you wish.

When you use money from your pension pot to buy an annuity, you can normally take up to 25% of the amount as tax-free cash.

To purchase an annuity, you can either go directly to an annuity provider or work with a financial or retirement adviser who will suggest what annuities are best for you and your circumstances.

2. Arrange a pension drawdown

A pension drawdown allows you to withdraw sums of money from your pension while leaving the rest to stay invested. 25% of the pension pot is available to be taken tax-free and the remainder will be taxed as income. You can choose the amount you wish to take on each withdrawal and you can request this to be on a one-off or on a regular, scheduled basis.

For some people this approach works better, as they can use their pension as a rainy day backup, or if they want to take a higher investment risk and wait for their pension to build. It’s worth remembering that as the pension pot could go up or down due to interest rates, your money may be worth more or less in the future.

3. Take a lump sum

If you want to manage your own pension money, or simply want to take it in one go, then you can just withdraw all or some of your money from your pension as a lump sum. While this may not be the best option for everyone, if you’ve never consolidated your pensions, and have one with a small sum in, this could be something you choose to do. It’s worth remembering that much like a pension drawdown, 25% of the money you withdraw as a lump sum is tax-free, and the remaining 75% is taxed as income.

4. Delay or mix your options

You do not normally need to access your pension pot in one go. Delaying access means your pension can continue to grow tax-free until you need it. This will potentially provide you with more income when you start taking money out.

You also don’t have to choose just one option when deciding how to access your pension. Mixing your options can give you flexibility to suit different needs at different times during your retirement. For example, you could use a guaranteed annuity income to cover essential spending, whilst using drawdown or lump sums to cover occasional needs, such as holidays or home improvements. 

Alternatively, you might decide to only use part of your pension at first, which could help cover any income shortfall when moving from full-time to part-time work. The rest could then be left invested to grow until needed.

What about defined benefit pensions?

Defined benefit schemes will have specific rules about how you can take money from your pension and when. It will vary depending on your defined benefit pension provider and your employer. Defined benefit pension schemes tend to run until you turn 65, and then you will start to receive the money.

As a defined benefit pension will give you a set income for the rest of your life, some may not allow you to take a lump sum, and others may only allow you to take a lump sum if you agree to the rest of your income being reduced.

The government has regulations on transferring your defined benefit pension if the total sum is over £30k. It’s worth seeking financial advice if you have a defined benefit pension scheme, as a financial adviser will be able to give you the best advice on what to do with your defined benefit pension.

Withdrawing from your pension before you’re 55 (57 from April 2028)

There are some circumstances where you may be able to withdraw money from your pension early without incurring a tax charge. These are primarily circumstances surrounding ill health, where you have a terminal illness and have less than a year left to live. In these circumstances, it’s best to contact your pension provider or ask a loved one to do this on your behalf.

Withdrawing from the State Pension

Withdrawing from your State Pension is fixed into law. You cannot normally withdraw a lump sum from your State Pension. Instead, you’ll receive a fixed monthly amount based on your National Insurance contributions. The government offers a State Pension forecasting tool that provides you with an estimate of what you could get, and when you could receive the money.

What to know before taking money out of your pension

While taking money out of your pension can be beneficial for your circumstances, it’s important that you are aware of the following:

You’ll have to pay tax

You can take up to 25% of your pension money tax-free. Whether you choose to take some of your pension as a lump sum, choose to purchase an annuity or arrange a drawdown, you will have to pay tax on the remaining 75%. When you pay, this tax may vary depending on the way you withdraw from your pension. A financial adviser should include how much tax you’ll have to pay when they advise you on your retirement options.

Investments can rise and fall

As with any type of investment, there is risk associated. The value of a pension fund can go up or down. There are some pension options that come with a lower risk, and ones that come with a higher risk. A pension adviser will explain the options you have and remove any confusion around your pension choices. 

Your situation may change in the future

Though you may benefit from the withdrawn money today, it’s important to remember that you will be deducting money from your future self. Consider how your circumstances may change in the future and whether your remaining pension will be enough.

Speak to one of our retirement and pensions advisers today

Pensions can be a minefield to navigate. At LV=, our retirement and pensions advisers will take the confusion out of it and give you the information you need to make the choice that’s right for you. All our advice is FCA regulated, so you can be assured your best interests are at the heart of every decision we make.

Why not have a commitment-free chat with a friendly adviser today on 0800 032 9301.