How to manage your retirement

You’ve spent years building up your retirement funds, thinking of how you’re going to spend them, but how do you actually get your hands on the cash?

How do I access my pension?

To claim your state pension, you should be sent a letter a few months before you reach the state pension age (currently 66) with details on how to claim it. You can also claim online via the government website. Once you’ve claimed your pension, you will receive a payment every four weeks.

Currently, for most workplace and private pensions, you can access them when you reach 55 years of age, however this is rising to 57 from April 2028. Speak to your pension provider or a financial adviser about your options for withdrawing it. There are a few different ways people access their pension, but it is important that you check your pension providers policy as each one may differ.

How can I cash in my pension?

Aside from your state pension, there are generally three options to withdrawing your pension, but it’s important to check with your pension provider to see what options your policy offers.

Take it all as cash

It is possible to take all your pension in cash. You can take the first 25% of your pension totally tax-free as one big lump sum. You can also take the rest, but you’ll pay tax on it, so this isn’t generally considered as the most efficient way to take your pension pots. Most people take the initial 25% tax-free as a lump sum, and then with the rest, opt for one of the below options.

Setting a guaranteed income

Most policies let you buy something called an annuity, where you use the money in your pension to buy a guaranteed income for a set number of years. The benefits of paying for a pension annuity are that it makes it easier to budget, and you can be confident knowing you have a guaranteed income.

The downside is that you cannot negate on this – once you have agreed an annuity product, you can’t go back on it. It also means, had you re-invested the money in your pension you may have missed out on a higher return.

Drawdown on your pension

One option is to leave your money in your pension, where it is being invested and potentially making more cash in returns. You have the option to remove cash from your pension when you need it, which could be every month or in small lump sums. You will still pay income tax on anything you withdraw after the initial tax-free 25%.

The benefits of this are that you can still take a regular income, and it’s flexible, too. If your investments increase in value, you will have more money to play with. However, the risk (as with all investments) is that the value could also go down, meaning you may end up with less money in your pension pot.

Can I take my pension at 55 and still work?

You can still work and start taking your pension at 55 (57 from April 2028). Some people use their pension to top up their salary whilst they reduce their hours.

How much tax will I pay on my pension if I still work?

The personal allowance for paying income tax doesn’t change when you start your pension. As when you were working, there is a base allowance of £12,570 that you can be paid tax-free. Anything above that is taxed and as your total income increases, you may go higher up the tax bands.

  • 0% on income up to £12,570
  • 20% on income from £12,571 to £50,270
  • 40% on income from £50,271 to £150,000
  • 45% on income over £150,000

Your first 25% of your pension is tax-free, but after that you would need to combine what you are withdrawing or receiving from your pension with your current salary and work out what tax band this puts you in.

What is a deferred pension?

Deferring a pension simply means you delay taking your pension, leaving your savings to be invested and potentially increase in value. If you do not want to start using the cash from your pension, then you can contact your pension provider to delay this and make the decision whether to still contribute to your pension, or whether to stop contributions and just let the money that you’ve already saved continue to be invested.

You can also defer your state pension. This means when you do start to claim your pension you should receive a higher weekly payment the later in life you start taking it.

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