You’re 56, the pension statement looks healthy and the office has never felt more tedious. The rules say you can get at your pension pot now. The kitchen needs doing, the mortgage is annoying you and that camper van won’t buy itself.
Being able to take the money and it being a good idea to take it are not the same thing. Draw early and you can end up handing a big slice to HMRC, getting stuck with a smaller allowance for future pension saving and stretching your pot over a longer gap before the State Pension starts. Here’s what to check first.
When can I take money from my pension in the UK?
There are two separate ages, and people mix them up all the time.
The first is the normal minimum pension age, the earliest you can usually take money from a private or workplace pension. It’s 55 for now. On 6 April 2028 it goes up to 57 under the Finance Act 2022. Some people keep a lower protected pension age through their scheme’s rules, so check yours before you plan around 55.
The second is State Pension age. It’s currently 66 and rises to 67 in stages between 2026 and 2028, with a later rise to 68 already in law. You can’t take the State Pension early. Get to your fifties without a plan and there’s a gap of ten years or more that your own savings have to cover.
Put a number on it. Stop work at 57, want £25,000 a year and wait until 67 for the State Pension, and that bridge costs £250,000 before any investment growth or inflation. For comparison, the full new State Pension for 2025/26 is £230.25 a week, roughly £12,000 a year. It helps a lot once it arrives. It does nothing for you before then.
The 25% tax-free lump sum is not free money
Most people can take up to 25% of a defined contribution pot without paying tax. Since 6 April 2024 the total tax-free amount across all your pensions has been capped by the lump sum allowance of £268,275, unless you hold an older protection.
That’s a good perk. The catch is what people do with it. Take £50,000 tax-free at 55 and leave it in a current account, and inflation eats into it while the money it came out of stops growing tax-free. Spend it on something you really need, or on clearing expensive debt, and it can make sense. Take it because you can, and it often doesn’t.
The other 75% is taxed as income when you take it, and that’s where most of the damage happens.
How much tax will I pay on a pension withdrawal while still working?
Taxable pension withdrawals go on top of your salary for the tax year. If you’re still earning, the money lands in your highest tax band.
Here’s Dave. He’s 58, earns £60,000 and takes £40,000 from his pot as a single lump sum. A quarter of it, £10,000, is tax-free. The other £30,000 sits on top of his salary, so in England, Wales and Northern Ireland, with the higher-rate threshold at £50,270, all of it is taxed at 40%. That’s £12,000 to HMRC, and Dave keeps £28,000 of his £40,000.
Now say Dave waits and takes the same £30,000 of taxable money in a year when he has no other income. The first £12,570 is covered by his personal allowance and the remaining £17,430 is taxed at 20%, so the bill is £3,486. Same money, same pension. Waiting saves him more than £8,500.
Your pension doesn’t care when you take it. HMRC cares a great deal.
Higher earners can do worse. Earn £130,000 and every taxable pound you take is taxed at 45%, so a £20,000 taxable withdrawal costs £9,000. The real trap is between £100,000 and £125,140. In that range your personal allowance shrinks by £1 for every £2 of income. If your income is £100,000 and you take £20,000 taxable, you pay 40% on the £20,000 and also lose £10,000 of personal allowance, which costs another £4,000. That’s £12,000 in tax on £20,000, an effective rate of 60%.
Scottish taxpayers have different bands, including rates of 42% and above, so the figures are different but the principle holds. Take money out while you’re earning and you’ll pay more tax on it.
The emergency tax and the £10,000 cap
Two more surprises catch people out. The first time you take a flexible payment, your provider often doesn’t have the right tax code yet. It taxes you as though you’ll get that amount every month for the whole year. People who expect a few thousand back can find a big chunk gone. You can reclaim the overpayment from HMRC with form P55, P53Z or P50Z, depending on your circumstances, or wait for it to be put right at the end of the tax year. Either way, you’ve lost the use of your money for a while.
The second surprise lasts longer. Once you take taxable money flexibly, for example through drawdown income or a lump sum beyond the tax-free part, you trigger the money purchase annual allowance. From then on you can only put £10,000 a year into defined contribution pensions with tax relief, instead of the usual £60,000. If you planned to pay a lot into your pension in your last working years, or your employer is generous, that’s a costly thing to lose. Taking only your tax-free cash doesn’t trigger it.
Is it worth taking a pension early or waiting?
Sometimes early access is the right call. Ill health, redundancy, clearing debt at a high interest rate or a planned run-down of hours can all justify it. The point is to decide on purpose.
Before you touch your pot, ask yourself a few questions. Can you take money in a tax year when your income is lower? Could you spread withdrawals over several years so that more falls into your personal allowance and the basic-rate band? Would ISA savings get you through the gap first, since ISA withdrawals are tax-free? And how long do you actually need the pot to last? Someone retiring at 57 could need it for well over 30 years.
Also keep in mind that unused pension pots are due to come into inheritance tax from April 2027. That changes the old advice to spend everything else first, but it isn’t a reason to empty your pension in a hurry and pay 40% income tax to do it.
If you’re 50 or over, Pension Wise through MoneyHelper offers a free, impartial appointment on your options. For anything big, such as transfers, defined benefit schemes or large withdrawals, an FCA-regulated financial adviser can be worth the fee.
In short
You can usually take your private pension from 55, or 57 from April 2028, and a quarter can come out tax-free. The rest is taxed as income, so taking it while you’re still earning can push it into the 40%, 45% or even effective 60% band. Spreading withdrawals into years when your income is lower, and knowing how you’ll cover the years before the State Pension starts at 66 or 67, usually leaves you with far more.
Sources
Midcent Money
Andrew Ingram writes about money for men 45 and over – the years when retirement starts to feel real and the decisions get bigger. Pensions and retirement planning, investing, savings, mortgages and tax: what changed, what it means for your plans and what's worth doing about it. No hype, nothing to sell, and a clear steer on when it pays to get personal advice.
One of Midcent's writers. Spotted something? Write to andrew@midcent.uk.
