Should you access your pension before you retire?

If you’ve got a defined contribution pension, whether from work or a personal pension such as a self-invested personal pension (SIPP), you’ll be able to start taking money out of it from the age of 55, rising to 57 in 2028. This is the normal minimum pension age (NMPA).

This ability can add real flexibility to your financial planning as you approach the end of your working life and provide you with a tempting source of cash. 

According to the latest data from the Financial Conduct Authority (FCA), it’s a popular option.

Its latest Financial Lives survey (2024) found that over a third (35%) of non-retired over 55s had already dipped into their pot - either taking a lump sum or income.

However, taking money out of your pension while you are still earning can have a significant impact on your long-term financial security, so if it’s something you’re considering, read on and consider taking expert advice.

Why do people take money out of their pensions before they retire?

There are lots of reasons why people take money out of their pensions before they’ve fully retired.

You might want to pay off a debt like your mortgage, treat yourself to the holiday of a lifetime or perhaps open the Bank of Mum and Dad and help your child buy their first home.

Alternatively, you may decide to use money from your pension as part of a phased retirement, to top up your income if you are working reduced hours.

What are the risks of taking money out of your pension before you retire?

The biggest issue to consider is the sustainability of your pot. The more money you take out now, the less you’ll have when you actually retire.

By leaving your money invested until you’ve stopped working, it could end up having a decade or more in the stock market and continue to grow (although stock market performance isn’t guaranteed).

If you take a lump sum out of your pension earlier than you need it, you’ll miss this opportunity and are likely to have a lower income in retirement as a result.

This can be a significant issue if you underestimate your life expectancy and go on to live for longer than you anticipate (as many people do). In a worst-case scenario, you could run your pot dry and be forced to rely solely on the state pension in your later life.

Another surprising consequence of taking money out of your pension is that it could end up reducing the amount of money you can carry on paying into your pot.

This is because once you have made a taxable withdrawal from your pension, you’ll likely trigger the money purchase annual allowance (MPAA). This will see the amount you can pay into your pension each year and still get tax relief fall from 100% of your earnings (up to £60,000) to just £10,000 a year. 

As such, this is a vital consideration if you are still working and want to rebuild your pot after you have made your withdrawal.

The exception to this rule is if you take money out of a small pension, which is considered one worth less than £10,000. In these cases, you won’t trigger the MPAA when you make a withdrawal.

Tax on pension withdrawals

Before taking money out of your pension, you should also consider how much tax you will likely pay on your withdrawal - you could end up handing over a significant slice to HMRC.

Although you can take 25% of your pension as a tax-free lump sum, you can only take that money when you ‘crystallise’ your pension - for example, by purchasing an annuity or setting up an income drawdown arrangement. 

If you simply make a withdrawal from your pension and leave the rest invested without crystallising it, only the first 25% would be paid tax-free. The remaining 75% would be added to your overall income for the year and taxed at your highest rate. 

Depending on the size of your withdrawal and your overall income, this could also be enough to tip you into a higher tax bracket.

You may also be charged emergency tax, as your pension provider won’t know how much income tax to deduct. You can claim the money back, but you’ll need to factor it into your withdrawal if you need a certain amount.

Get expert pension advice

The ability to take money out of your pension from age 55 can be a great feature of your financial planning tool box, and there are many cases where pre-retirement withdrawals can prove helpful.

However, it’s not a decision to be taken lightly, and there could be a high price to pay for this flexibility. For this reason, it pays to get professional advice from a financial adviser first.

They will be able to review your overall finances and help you work out whether you need to make a withdrawal from your pension to achieve your goal and, if you do, will help you do it in the most tax-effective way.

Unbiased can quickly match you with a qualified financial adviser.