Pension withdrawal depends on your retirement age and on the type of pension it is. Once you’re 55, you can withdraw your pension savings.
To withdraw from a private pension, you need to be at least 55 - the Government is proposing to increase the retirement age to 57 in 2028. Many choose to defer their pension and receive it later in life. It is also possible to receive your private pension earlier than 55 if you are retiring due to ill health.
There are several ways you can withdraw a pension, depending on your pension plan:
- as income drawdown - as monthly income from your pot
- by purchasing an annuity with your pension savings
- taking it as several cash lump sums or one lump sum
- a mix of options.
Depending on the type of pension plan you have - defined contribution or defined benefit pension scheme - the options for receiving a pension vary. You may wish to visit “Pension Wise”, a service set up by the UK Government or talk with a financial advisor to discuss your options.
Raindrop helps people understand their options and how to receive their retirement savings for a better and more confident financial future. Let's talk about pension withdrawal in more detail.
Withdrawing from a defined benefit pension
A defined benefit pension guarantees a stable income for the rest of one's life. Once you reach retirement age, you start receiving a monthly income from your pension.
You are also able to withdraw a portion of your pension savings tax-free - the amount depends on what the pension provider offers. The pension provider will reduce the amount of income you'll receive after, based on the amount you've withdrawn as a lump sum.
Withdrawing from a defined contribution pension
You have several options when it’s time to take your pension money. Talk with your pension provider or financial advisor to find out about your options, as pension rules vary.
There are several ways you can take a lump sum. You can cash in the whole pot or take out several ones whenever you need to.
It is worth noting at this point that only 25% of your entire pot is tax-free. The rest of your pension savings will be taxed when withdrawn, based on your Income Tax rate.
Depending on your pension plan, you might be eligible to withdraw your whole pension pot as a lump sum - no matter the size of the pot. As explained previously, only 25% of the lump sum will be tax-free, with the rest of the pot being taxed based on your Income Tax rate.
- For example, your pot is worth £100,000. If you decide to take the whole pot as a lump sum, £25,000 of it (25% of £100,000) will be tax-free, with the rest £75,000 getting taxed based on your Income Tax rate.
You can also withdraw your whole pot as a lump sum if it’s worth £10,000 or less, and you can do this a maximum of three times. With each small pot lump sum, 25% is tax-free and the rest 75% is taxed based on your Income tax rate.
It's also common to withdraw several lump sums as and when you need it until the pot runs out. This allows you to withdraw a lump sum, leaving the rest invested until you withdraw another one. However, as all investments carry risk, the value of your pot is not guaranteed, and it can go down as well as up. Again, only 25% of your entire pot will be tax-free, if you decide to withdraw lump sums.
Income drawdown is the most common option when it comes to withdrawing a pension. This method involves taking an income from your pot every month and leaving the rest to be reinvested. However, as all investments carry risk, the value of your pot is not guaranteed and it can go up as well as down. An income for life is not guaranteed either
Income drawdown allows you to withdraw from your pot as much income as you'd like, without limits.
Check with your pension provider or financial advisor on your pension withdrawal options, as not every provider offers this option.
An annuity is a financial product that you purchase from an insurance company with your pension savings. It also guarantees a stable income for a lifetime. The amount you can get depends on how long you're expected to live and how many years the insurance company will pay you for.
Most people take a tax-free lump sum from their pension and with the rest of the savings, purchase an annuity.
Let's answer some essential questions on pension withdrawals.
What are the tax implications?
As it was explained previously, you can withdraw a 25% lump sum from your pot tax-free and leave the rest for reinvestment, withdraw as income drawdown or purchase an annuity. The rest of your pension income will be taxed based on your Income Tax rate, once you start withdrawing it.
- If you choose to cash in your whole pension, 25% of it will be cashed in tax-free, unless you have several small pots worth less than £10,000.
- If you choose to cash in multiple lump sums, each time 25% of each lump sum will be tax-free.
Also, in the case that you're working and simultaneously receiving your pension, the combined amount that exceeds the personal allowance tax band will be taxed at your marginal rate.
What happens if I pass away before I take my pension savings?
- In a defined benefit pension scheme, your beneficiaries receive a lump sum 2-4 times your salary, depending on the pension provider's rules.
- In a defined contribution scheme, your beneficiaries can choose how to receive your pension savings - as a lump sum, drawdown or annuity.
You can find more information on what happens to your pension when you die here.
Can I withdraw my pension early?
Early retirement is allowed to people with poor health. You can access your pension before 55 if you are unable to work due to ill health.
You can find more information on retiring early due to ill health here.
Can I withdraw my pension fund while working?
Yes, you can receive both your pension and get paid a salary while working. Just as you don't have to withdraw your pension when you're 55, you don't have to stop working to receive your pension.
How Raindrop is here for you
Our mission is to help people feel confident about their options when it’s time to retire and withdraw their pension. We accomplish this by finding lost pension pots and combining them in one online pension plan.
You are able to decide efficiently on how to withdraw your pension when your hard-earned money is in one place and not separated into several pots. You have more confidence in your retirement plan and you feel financially secure.
Interested in taking the next step in your pension journey? Start here.
We offer investment plans offered by leading money managers: BlackRock® and Legal & General. To know about how our pension finding and combining service works click here.
If you choose to consolidate your pensions with Raindrop please note that like any investment your capital is at risk and the value of your pension can go down as well as up.