Five things you need to know about taking money from your pension savings

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Whether you’ve already started accessing your pension money or you’re just thinking about it, here are five things worth knowing to help you make the most of your retirement savings.

1. You’ve got options

• Take a flexible income (also known as income drawdown) – this is where you access your pension savings through regular lump sums or one-off withdrawals. The rest stays invested. 
• Take a guaranteed income for life (also known as an annuity) – this option means you’ll get a set, regular income for the rest of your life.
• Take one or more lump sums – you can choose to take some or all your pension savings. You decide how much to take and when to take it.
• Or a combination of these three options.

The option you choose will impact your retirement plans and lifestyle, so it’s important to be sure you’re picking the right one for you. You can find out more about your retirement options in our guide.

2. How you take your money will impact the tax you pay

Of course, there’s the all-important 25% tax-free lump sum which most people will get – but what about the rest?

You’ll pay income tax on the remaining 75% of your pension pot. The amount of income tax you pay can depend on a few different things. For example, if you start taking money from your pension savings but still have income sources from elsewhere, you could find that you’re pushed into a higher tax bracket. This could be the case if, for instance, you’re still working part-time or are renting out a property.

This can still happen even if your pension pot is your only source of income. Taking out a large amount in one go could also mean you pay higher tax on your withdrawals, compared to if you were to spread it out in smaller lump sums over the tax year.

Let’s say you decide to take out £10,000 as a one-off payment. The government could assume that this is now your monthly income and deduct emergency tax from this payment – meaning you’d pay £2,952 in tax and would likely have to claim it back. But if you were to spread that £10,000 across 12 monthly withdrawals instead, you wouldn’t pay any tax as you’d be under your personal allowance for the year – which is £12,570 for the 22-23 tax year. 

Bear in mind that tax rules are different in Scotland. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment.

3. Your money could run out

Unless you decide to buy a guaranteed income for life, your pension money could run out. We’re living longer these days, so it can be easy to underestimate how long you might need your pension money to last. 

If you take out too much in the early years, or if your investments don’t do what you expect them to, you could find yourself in a sticky situation.

Your income needs are likely to change throughout your retirement. For example, if you pay off your mortgage, you’ll find you need less. But if you find you need to seek additional care later on in life, you might find you need more. So, when you’re making plans to take your pension money or if you’re thinking about adjusting your current retirement income, try to think about the long-term impact it could have and take financial advice if you need it.

4. Where you’re invested can make a big difference

When you take money from your pension savings, the rest stays invested. And where that money is invested can have a big impact on how long your money will last and how much you can afford to take out as income or a one-off lump sum. Again, this doesn’t apply if you’ve bought a guaranteed income for life.

The first thing to think about here is how risky your investments are – basically, how exposed they are to market ups and downs. The higher the risk, the more likely they are to go up and down with the markets.

But if you’re in lower-risk investments, you could find the value of your pension savings is less likely to fluctuate and impact your retirement savings.

Another thing to keep in mind is when you take your money. If you take money out of your pension pot when markets are down – and so the value of your pot has fallen – you could find you’re withdrawing a larger proportion of your overall pot. Kind of like taking the same size slice from a smaller pie.

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Once you’ve taken it out, you’ll have less money invested to potentially recover losses if and when markets (and your investments) rise again. And this might affect how long your money lasts.

Remember, the value of your investments can go down as well as up and you may get back less than was paid in.

5. Taking money out can have a knock-on effect

Once you start taking taxable income from your pot (anything over your tax-free entitlement), you could be impacted in other ways.

Firstly, the amount you can pay into your pension plan while still getting tax benefits will reduce from £40,000 to £4,000 a year. So if your plan is to take money from your pension pot but continue working and paying in, you should keep this in mind.

Next, taking money from your pension savings could impact your eligibility for any means-tested benefits, as it’ll count part of your income. It also could impact any debts you owe. Any business or person you owe money to can’t normally make a claim against your pension savings if you haven’t accessed them. But once you have, you might be expected to pay.

If you need help with managing any debts, try National Debtline or Citizens Advice for support. Or MoneyHelper has some useful information around dealing with debt.

If you need help or guidance on your pension savings, Pension Wise (a service from MoneyHelper) offers free, impartial guidance if you’re over age 50. You can book an appointment to help you understand what your overall financial situation will be when you retire.

The information in this article is based on our understanding in October 2022 and should not be regarded as financial advice. 

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