Understanding your pension benefits can make a big difference to your financial security in retirement. Whether you’re approaching retirement age or just planning ahead, here are five key things to know when it comes to private and workplace pensions.
1. You can usually access your pension from age 55 (rising to 57 in 2028)
From this age, you can start taking benefits from most personal and workplace pensions. However, you don’t need to take benefits at this age and can leave them invested until you need them. You may be able to access your pension earlier if you’re retiring due to ill health, or if you have a ‘protected retirement age’ from a past occupation that allows you to take your pension earlier.
2. You can take up to 25% of your pension tax-free
You can normally take up to 25% of your pension as a tax-free lump sum, with the remaining 75% subject to income tax. This means careful planning is essential. Taking too much in one tax year could push you into a higher tax bracket, resulting in a larger tax bill than necessary. Spreading withdrawals over several years or taking smaller, regular amounts can help manage your tax liability effectively.
3. You have several options for taking benefits
You can take cash lump sums, buy an annuity (a guaranteed income for life), or use ‘flexi-access drawdown’, which lets you keep your money invested and draw income when needed. And you may be able to use a combination of these options. Understanding your options helps you create a retirement income strategy that suits your circumstances and goals.
4. Taking benefits can affect what you can pay in later
Once you start taking taxable income from your pension, the Money Purchase Annual Allowance (MPAA) is triggered. This limits the amount you can pay into defined contribution pensions each year to £10,000, instead of the usual £60,000. If you plan to keep working and contributing, it’s important to know when this applies.
5. Passing your benefits on
Currently, unused pensions can be inherited free of Inheritance Tax (IHT) but that's about to change. From April 2027, any money left in your pension will be added to your estate and could be taxed at 40% if your total estate exceeds the IHT threshold. By ‘estate’ we mean your home, savings, investments and any other assets.
If you’re unsure which option is right for you, and to understand all the limits which may apply during your lifetime and when passing benefits on after your death, it’s a good idea to speak to a financial adviser. The resources within these pages can help you find a financial adviser in your local area.
Quick recap
- Think carefully about when and how you start taking your pension.
- Plan withdrawals to manage your tax bill over time.
- Mix flexibility and security to suit your retirement goals.
- Be aware that taking taxable income limits future tax-efficient contributions.
- Review your pension nominations before the 2027 IHT change.
This article reflects our understanding of current legislation, which may change. While we can provide information, we can’t give you advice and therefore we recommend you seek professional advice before making any financial decisions. Investments can go down as well as up, and you may not get back the amount invested. Tax treatment depends on individual circumstances and available reliefs may vary.