Full pension withdrawal – a good idea?

man withdrawing money from pension cash machine

Can I withdraw my UK pension?

Unfortunately, we’ve had this question a lot recently. In simple terms, yes. You must be over minimum pension age (55 years) and have a pension which allows full withdrawal. If your pension doesn’t allow full withdrawal, you can switch to one that does.

Increasing uncertainty in the economy and jobs market has led to a spike in online searches for pension encashment. People are looking for ways to get their hands on retirement funds. While we understand the desire to withdraw pension money, we must warn you of a number of risks, costs and complications.

When can I take pension money out?

The current minimum pension age for UK pensions is 55 years. If ANYONE tells you they can help you access funds before this age, they can only be employing dodgy tactics.

Those in serious ill health may be eligible for early retirement and access to pension resources. If this is the case, you can find some valuable information on the Pensions Advice service website.

If you are not applying for access due to poor health, and are under 55 years, you could be taking on highly risky and complex methods of accessing money early. In a lot of cases, pension ‘busting’ scams involve high interest loans against the pension. In all cases, this results in the pension fund suffering a big loss in value over the long term.

How much will a full pension withdrawal cost?

If you have a simple personal pension or SIPP, you may be able to administer a full withdrawal yourself. Use our research toolkit to find the details and functions of your plan.

There will be some costs associated with pension withdrawal. If you have a defined benefit scheme, you will need to transfer your pension before it can be withdrawn. You will need professional advice for this, and it is likely that you will be advised not to do it.

If you hold an old-style pension or defined contribution scheme, it may not have the functionality to allow full withdrawal. In that case you can switch to a new plan. You can instruct this yourself, but it is better to get advice to help understand the process and ensure a swift completion.

Advisory Costs

A regulated adviser has the responsibility to ensure your financial security. If they think early withdrawal and potential expenditure will overwhelm your long term financial security, they will advise against it. In this event, you will have the option to insist against their advice, as long as you can demonstrate your understanding. Whether the advice is ‘for’ or ‘against’ withdrawal action, a cost will apply for that advice.

This cost may be a fixed fee and/or a percentage charge. As with all advisory costs, this can be deducted from your pension funds instead of being paid personally.

Product Costs

The pension plan is losing you as a customer and to add insult to injury, has some work to do for the full withdrawal and closure to happen. An administration fee for processing the withdrawal will apply. This should be a fixed fee and deductible from the pension fund.

Exit Penalties

Dependent on the type and structure of the pension, and the investments held, exit penalties may apply. Ensure you research your pension and ask about costs and penalties before considering withdrawal.

Bad time for the markets

If you have a DB scheme, or your pension money is held in cash, market performance has little effect. However, if you have a private plan, it is likely invested in the markets. Current market conditions in light of Covid-19 are uncertain, at best.

It could be a bad time to withdraw money from the investment markets. Consider the value of your pension and its performance this year, as well as whether you believe it will recover. Only withdraw funds if you’re comfortable cashing-in from the investment markets.

Don’t withdraw your pension money unless you can afford to

This is a stupid statement for those fallen on hard times. If you could afford not to use your savings, of course you wouldn’t. What we mean is, don’t treat pension funds like a bonus.

A 65-year-old male should live to 85 years and female to 87 years. That means if you want to retire from work at 65, you will need enough money to pay yourself an income for over 20 years. Use our pension calculators to understand how changes in your pension funds could affect when you can afford to retire from work.

Don’t spend your retirement money too soon

It may be good planning to get your pensions streamlined into one fully functioning UK pension. A pension such as the SIPP allows full and partial withdrawals. Ad-hoc withdrawals could suit better for short term needs.

Keeping pension funds in the pension is good for long-term tax planning. Pension money is not subject to Inheritance Tax and doesn’t attract income tax until it is taken out.

How pension withdrawals are taxed

Before making any pension withdrawals, you must consider tax. UK pensions functioning for flexi-access drawdown are taxed as follows:

  • 25% of the fund is available free of tax

This is subject to lifetime allowance limits

  • 75% of the fund is subject to income tax at your highest marginal rate

If you live outside of the UK, consider UK and local taxes as well as double taxation reliefs available

A full pension withdrawal means that the 75% is taxed all in one tax year. This isn’t often a good idea as can knock you into the highest rates of tax. Read our tax guide for more information about pension and cross-border taxation.

Before making a full withdrawal, consider whether partial tranches would be better. You may need your funds, but do you need them in full, at once? You could make significant withdrawals over a five year period, spreading your tax exposure over time while achieving your goal of needing pension funds in your hands.


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