How to withdraw your pension

Different types of pensions have different rules around how and when you can take your money. Here’s everything you need to know.

Share this guide
Older woman, sitting on the floor using a tablet

Pensions are long term investments. You may get back less than you originally paid in because your capital is not guaranteed and charges may apply.

Rules around auto-enrolment mean that most of us have at least two types of retirement fund – a workplace scheme and the state pension.

However, some people will have a final salary or defined benefit (DB) pensions, while others may have Defined Contribution (DC). You might also have a private pension or even a Lifetime ISA. 

The rules for each type of pension are different, meaning you can access them at different ages and in different ways.

Sometimes schemes even have their own specific rules making them work differently from others of the same type. Here we explain all your options.

Make the most of your tax-free ISA allowance.

How old do I need to be to access my pension?

The age at which you can access your retirement savings depends on what kind of pension you have. Typically, defined contribution schemes have the earliest access rules, but there are tax implications if you take the money straight away and then want to save more later.

Many schemes will allow early access if you have a terminal illness, and some DB funds will let you take money earlier in return for a lower payout. Here are the rules for each type of scheme:

Type of pensionAge you can withdraw
Defined contribution (DC) pensionTypically 55, rising to 57 in 2028, but some schemes may have different rules
Defined benefit (DB) pensionUsually 60 or 65 or state retirement age. You might be able to get early access in return for a lower income. Check your scheme rules
Self Invested Personal Pension (SIPP)Varies. New claimants will have state pension ages between 66 and 68, although the government may increase ages in the future
State PensionVaries
Lifetime ISAThese are to help buy a first property or for retirement at the age of 60. You can access it earlier, but you will lose 25% of the withdrawal

How can I choose to take my pension?

Once again, how you access your pension will depend on what type you have. Usually, you will have a few options, each with different tax implications. It’s important that you research your choices carefully. You can get free, impartial guidance from the government’s Pension Wise service, but you should also consider taking independent financial advice.

Here are the main paths available to you for each of the main types of pension.

State pension withdrawals

The state pension is the simplest of your retirement savings to manage. However, many people don’t know that you won’t get it automatically – you have to claim it.

You should get a letter no later than two months before your state pension age, telling you what to do. Even if you don’t get the letter, you can still claim your pension provided you’re within four months of retirement age. The quickest way to get the money is online through the government website.

If you want to keep working, you can choose to defer your state pension, which will increase the amount you get.

The new State Pension is usually paid every four weeks into an account of your choice. 

How to access your defined contribution pension or SIPP

Defined contribution pensions are the most common form of workplace savings. If you have a private pension, such as a self-invested personal pension (SIPP), this is a defined contribution pension, too. 

In a nutshell, a DC pension is one where you pay money in, get tax relief from the government, and your bosses will pay too if you’re enrolled through a workplace scheme. The money is invested, and how much you get at the end will depend on what you put in, any charges you pay and the returns you get.

Since pensions freedoms were introduced, you have a lot of flexibility about how you can take your defined contribution savings when you come to retire.

Broadly, there are four main options.

  • Buy an annuity - this is an insurance product that gives you an income for life, or for a fixed, pre-agreed time period.  Your income will be taxed, but you can take a 25% tax-free lump sum.

  • Drawdown – you can use your savings to provide a flexible retirement income where you draw money from your pot as and when you need it. You’ll keep the remaining funds invested, so they can continue to grow over time. You can vary the amount you take according to your needs. You take 25% of your savings tax-free (up to a limit of £268,275) and any subsequent withdrawals will be taxed at your marginal rate (income tax).

  • UFPLUS – this is when you take a series of lump sums without getting a tax-free lump sum. For each lump, the first 25% will be tax-free, and you’ll pay income tax on the remaining 75%. This means you spread your tax-free allowance over time.

  • Take the whole lot in one go  - You could decide to take your whole pension all at once. This is rarely a good idea unless you have a very small pot. The first 25% is tax-free (up to a limit of £268,275), but the rest is taxed at your marginal rate. If you take more than £150,000, for instance, you’d be an additional rate tax payer, which means a substantial sum of your cash would go to the taxman. If you split the same pot over several years, your income would be much lower, and you’d pay less tax.

You can also choose to do a combination of the different methods. For instance, you might want an annuity to cover your later years, but more flexibility earlier on. Or if you have a defined benefit pension and a small DC scheme, it might make sense to take the DC pot as cash.

Not all pension schemes will offer every option. Even if yours does, it’s very important to shop around to find the best post-retirement provider, or you could end up overpaying with expensive charges.

Of course, you don’t have to access your pension immediately when you reach 55. If you’re planning to keep working, it might make sense to leave it invested where it can grow until you need it. 

Equally, if you decide to go part-time, you might want a bit of pension income alongside a lower salary. Speak to an IFA to get help structuring your income tax-efficiently and to make sure it will last for your whole retirement.

One thing to be aware of is the Money Purchase Annual Allowance. This is a complicated rule, but essentially it means that once you’ve accessed your pensions flexibly, there is a limit to how much you can continue to save. If you take some pension but continue working, for instance, it means that you can save a maximum of £4,000 a year (rising to £10,000 after April 6, 2023) without attracting a hefty tax charge.

How to claim

In the run up to your 55th birthday, your pension provider will send you something called a “wake-up pack”. This will outline all the options available to you, and also encourage you to take your Pension Wise guidance session. These packs will also outline next steps in accessing your money and usually ask if you want to withdraw a lump sum payment worth 25% of your total pension pot.

You can claim on your SIPP in the same way you would if you had saved in a defined contribution pension with an employer.

You will be contacted by your pension supplier up to six months before you are eligible to claim on your workplace pension and given the option to withdraw up to 25% of your pension pot.

Find out more on Self Invested Personal Pensions here

In February 2021, the FCA changed the rules for those who have defined contribution pensions. Under the new system, pension providers must offer their customers investment pathways that will be designed to apply to four specific scenarios. It is then up to the individual to choose which pathway is right for them. This is designed to make sure that your pension fund is invested in a way that matches your retirement plans

The four scenarios are:

  • I have no plans to touch my money in the next five years.

  • I plan to use my money to set up a guaranteed income (annuity) within the next five years.

  • I plan to start taking my money as a long-term income within the next five years.

  • I plan to take out all my money within the next five years.

How to access your defined benefit or final salary pension 

A defined benefit or final salary scheme is one when you get a guaranteed income in retirement, which isn’t based on your contributions or investment returns, but instead how much you earned when you were working and your length of service.

These schemes are incredibly valuable and vanishingly rare. While they’re still popular in the public sector, they’re rarely seen in the private sector.

Essentially, when you retire you’ll be paid an annual pension for the rest of your life based on the salary you were earning when you were at work.

Sometimes, you can take a lump sum upfront, and reduce the amount you get each year as income.

Your pension could be paid weekly, monthly or even annually. Different schemes have different policies and sometimes it depends on how much you’ve got saved so check with your provider or scheme administrator to be sure.

If you want more flexibility, you can transfer your pension to a defined contribution one and take advantage of the access options there. Be warned – you’ll usually have to pay for advice to prove you understand what you’re doing, and swapping across will usually leave you in a far riskier position. DB schemes usually have valuable spousal benefits bit built-in too, which you would lose if you transferred out.

DB pensions withdrawals are calculated differently, and each scheme has its own formula for making deductions. Every year, your scheme should send you an annual statement that outlines how much you will get in retirement and when you’re your retirement date is.

Six months before retirement, you should get a wake-up pack explaining your options. You might be able to defer your retirement date in return for a bigger annual income.

Find out more on DC and DB pensions here

Can you withdraw your pension early?

This depends on the type of pension you’ve got, and specific scheme rules can vary. Contact your provider to find out what your options are and whether there are any penalties for early access. 

If you need your pension money early to pay off debt, then speak to an independent financial adviser first who may be able to offer an alternative solution.

If you’re terminally ill, you can usually access your pension early without penalties. Again contact your provider to determine your options.

Find the best personal pension plan to make your money work as hard as it can.

About Dom James

View Dom James's full biography here or visit the press centre for our latest news.