Can I take money from my pension plan but keep working and saving?

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Want to start taking money from your pension plan but aren’t ready to give up working life just yet? Here are five things to consider.

Ever since pensions changed back in 2015, one thing many people want to know is: can I take money from my pension pot and still work – and keep paying into it? 

The answer is yes you can. There are lots of reasons you might want to access your pension savings before you stop working. You might want to be able to afford to reduce your work hours, take that holiday of a lifetime, or the money could be very useful for supporting your children through school or university.

We take a look at five things you need to consider when you start taking your pension money while you continue to work and pay in.

1. Starting to take your pension savings - the basics

You can normally dip into your pension savings whenever you want from age 55, although this is due to rise to 57 from 2028. And you’ll usually get a quarter (25%) tax-free. So if your pension pot is valued at £100,000, that’s £25,000 tax-free.

You can take your tax-free cash as one lump sum, or in stages if your pension plan allows it. Do check with your provider as not all pension plans let you do this.

Anything above your tax-free cash is taxable, just like any other income is. Our guide on Ways to take your money explains more about your options, how pensions are taxed and how to take your money tax efficiently.

2. Why it can make sense to keep contributing

Paying into your pension plan can make sense, whatever your age. And if you are in a workplace pension, your employer may contribute too – a valuable benefit you don’t want to miss out on. Some employers will even offer matching schemes. So the more you pay in, the more they will too.

On top of that, it’s important to take into account the tax benefits you get on payments into your plan, which can make your pension plan one of the most tax-efficient ways to save for your future.

In a nutshell, your payments are topped up by HMRC. The amount you get is largely based on the rate of income tax you pay. For example, if you pay basic rate income tax you get 20% relief, so it normally only costs you £80 to save £100 into your pension plan. And if you pay higher rates of tax, saving more can cost you even less. 

3. Is there a limit to how much I can contribute?

You have an ‘annual allowance’ which can limit the amount you can pay into your pension plan – regardless of what you earn. 

The Annual Allowance is the total amount that can be paid into any of your pension plans in a tax year and includes contributions from you, your employer and any third party. The limit is currently £40,000 or the amount you earn in a year, including tax breaks – whichever is lower. If your payments go over this amount then you might face a tax charge. 

In some cases, a reduced annual allowance could apply. For example, in some circumstances taking a taxable income from your pension plan could trigger the Money Purchase Annual Allowance, which is £4,000 per tax year. That’s a big difference to be aware of.

4. Should I access my pension now?

Something you should consider carefully is whether to access your pension money early at all.
 
You need to manage your withdrawals and plan for the future to make sure your pension pot lasts as long as you need it to. And don’t forget, payments in to your plan could be restricted if you take more than your tax-free amount.   

Are there other sources of income that could be accessed first like an ISA or savings? 

Remember the longer you leave your money invested, the more potential it has to grow – although as it’s invested, it can go down as well as up in value and you could get back less than was paid in.

5. Get more support and guidance

Our retirement checklist looks at tax, passing your pension money on tax efficiently, how your entitlement to any means-tested benefits could be affected when you access your pot, and more.

To find out what your options are, contact your provider. You could also get free impartial guidance with Pension Wise, a service from MoneyHelper, if you're aged 50 or over. Go to their website or call 0800 138 3944. It's important to shop around and compare providers to get the best deal for you.

You might want to take advice on something so important. If you don’t have an adviser you can find one local to you at unbiased.co.uk. There’s likely to be a cost for this.

The information here is based on our understanding in July 2021 and shouldn’t be taken as financial advice. 

Laws and tax rules may change in the future and your own personal circumstances, including where you live in the UK, will have an impact on tax.