What if I take my pension early?
It’s actually possible to start benefiting from your pension from the age of 55 – even earlier if you can no longer work due to poor health. Tapping into your pensions savings sooner obviously means that they have to stretch even further to fund a potentially longer retirement.
The pension options are available to everyone over the age of 55. But that doesn’t necessarily mean that by drawing on your pension savings you have fully retired. You may want to continue working and contributing to your retirement savings.
These payments can be regular and/or occasional, and will continue to benefit from tax relief. For example, you may choose to make regular payments into a pension plan and/or add the odd lump sum from a bonus or inheritance, during any tax year. This change does not affect the total amount you can hold in your pension savings over your lifetime, known as the 'Lifetime Allowance' This is the total amount you can build up in pension plans over your lifetime while still benefiting from tax relief. The allowance is £1,073,100 for the tax year 2021/22. If you save more than that limit, you’ll have to pay a tax charge known as the ‘Lifetime Allowance Charge’. This charge is only applied to the amount of pension savings that exceeds the Lifetime allowance. Currently the charge is 55% if you take your money as a lump sum, or 25% if you choose an income option. Bear in mind that you’ll have to pay income tax too on any income or lump sums taken from your pension(s) that fall outside of the 25% tax-free money. . Currently, the maximum amount is £1,073,100 (2021/22).
Some things you should check
- Loss of guarantees - Does your pension offer any type of guarantee, such as income or fund value, which is based on your current selected retirement date? What happens to this guarantee if you access your retirement before your specified retirement date?
- Charges - Are there any special conditions relating to your pension policy? For example, are there restrictions or charges that may come into play for any of the pension options, including transferring money to another provider?
- Tax - There could be tax implications should you decide to retire before your selected retirement date.
- Inflation - Rises in everyday costs due to inflation over a longer period could mean your pensions savings will be of less value in real terms in later life.
Retiring early is such an important decision that it’s worth exploring all the options so you know what income to expect from your pension savings. Even if you’re only mildly interested in an annuity, it’s worth getting a quote for one. Your postcode, health and lifestyle are all taken into account by providers to calculate your life expectancy and how much an annuity will pay you.
Dipping into pension savings from age 55 could reduce your Annual Allowance from £40,000 to £4,000 (2021/22). The lower allowance is known as the ‘ Money Purchase Annual Allowance This relates to a ‘defined contribution pension’, once you access your defined contribution pension, it could reduce your Annual Allowance from £40,000 to £4,000 (2021/22). It’s this lower allowance of £4,000 that is known as the ‘Money Purchase Annual Allowance’ (MPAA). It means that you’ll benefit from tax relief on the money you put into your pension of up to 100% of your taxable earnings or £4,000, whichever is lower. But for this to happen, you will need to access your defined contribution pension in a particular way, known as ‘flexible access’. Examples are taking a lump sum of £10,000, or more, or by flexi-access drawdown. ’ (MPAA). We’ll let you know in advance if this affects you – so too will other pension providers. For further details visit the Money Advice Service.