The freedoms that come with releasing money from your pension at age 55

With the right type of pension scheme in place, you can usually start taking money from the age of 55. Find out what your options are.

Pension release is simply the act of taking money early from your pension (but not before you reach 55). You can release money from all personal/private pensions and many workplace schemes.

In the majority of cases, it’s not possible to take the money before this age. You could use this to help top up your salary if you are still working, to enable you to work fewer hours or to retire early.

What’s right for you is going to be dependent upon your specific circumstances. For example, your plans for the future and other savings or investments that you have.

Taking money from your pension early may mean you have a lot less to live on in the future. You should never view a pension as an easy way to raise money. It’s one reason why it makes sense to get financial advice before making any big decisions.

Buy an annuity

An annuity is when you sell your pension pot to an insurance company in exchange for a guaranteed, regular income for life. However, this has become a less popular option because they’re very inflexible, and rates have fallen sharply over the last 10 years.

It’s important to remember that you no longer own your pension pot with this option, and your decision is usually irreversible. You can find an at-a-glance overview of your income options at retirement on the Portafina website.

That’s why it makes sense to ask a regulated financial adviser to do all of the hard work for you. You’ll want to consider what type of annuity you need, if you’re getting the best deal, and what options you have when it comes to taking an income from your pension before you proceed.

Pension drawdown

You may also want to use your pot to provide a flexible retirement income or pension drawdown. This choice means you have started to take an income from a personal pension scheme, either as regular payments or lump sums as and when you need them.

You can normally take up to 25 percent (a quarter) of your pension pot, or of the amount you allocate for drawdown, as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income.

You need to carefully manage your investments because, unlike with a lifetime annuity, your income isn’t guaranteed for life. The upside is that you’re not stuck with this option forever. You can change your mind at any time and for whatever reason.

One of the freedoms that come with this option is the freedom to use your money as and when you choose.

Take small cash sums

Another option for using your pension at age 55 is to take small cash sums from your pot. You can take cash as and when you need it and leave the rest untouched where it can continue to grow tax-free.

Remember, there may be charges when you take cash out and limit to the number of withdrawals you make each year. Typically, the first 25% (quarter) is tax-free, and the rest counts as taxable income.

There are tax implications to consider, and your pension pot isn’t re-invested into new funds, and it won’t provide for a dependent after you die.

As for taking pension lump sums, if your money is invested in a personal pension, there are two main ways you can take lump sums from the age of 55. You can enter pension drawdown, which means all withdrawals are taxed after the first 25%. Or, you can take what is called UFPLS, which have different tax rules.

Taking your pension in one go

You may choose to take all your savings in one go from the age of 55. You can take the first 25% of your pension pot tax-free.

Remember that by taking some or your entire pension in one go, you could be drastically reducing the amount of money you have to live on in the future.

Strongly consider if you can afford to take your pension in one go and if you can still set yourself up for a comfortable future and retirement. Consider meeting with a regulated financial adviser before making any decisions so you can ensure that you’re able to take your money out as tax-efficiently as possible.

It can be risky because it’s highly likely that you’ll be landed with a large tax bill. Also, it won’t pay you or any dependent a regular income and, without very careful planning, you could run out of money and have little to live on in retirement.

Leave it untouched

One option is to leave your pension pot untouched and delay taking the money until a later date. You don’t have to take money from your pension when you reach 55.

It’ll continue to grow tax-free, and you’ll probably end up with more income in the long run once you do choose to access it. Imagine the size of the pot you may potentially have once you reach 60 or 65.

Generally, you cannot take money from your pension before you turn 55. If a company or individual says, you can, then be careful, as it could be a scam. Only in very rare circumstances is someone allowed to take pension money before they reach 55, such as critical illness.

The right approach will give you financial freedom

As you now know and understand, there are many options and freedoms you have when it comes to determining what to do with your pension.

Releasing money from your pension once you hit age 55 is a big responsibility and decision. It’s worth taking the time to think through your choices and meeting with an expert who can provide financial advice if you feel unsure how to proceed or need more information.

With the right approach, you’ll be on your way to finding financial freedom and setting yourself up for a comfortable retirement. 

Photo by Maria Lupan