Your pension scheme has rules about when and how you can take your pension. It's a good idea to check with your scheme administrator what options are available to you. However there are some common elements to most pension schemes.
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Many pension scheme rules will set an age (usually 60 to 65) or date from which they expect you to start taking your pension. Your scheme may allow you to take your pension earlier or later than this date - but this could affect how much pension you get.
Under tax rules the earliest age you can normally start taking your pension is 55. If your pension starts earlier than this it will be an unauthorised payment and both you and your scheme administrator will pay extra tax on the pension. You also won't be able to take a tax free lump sum. The exceptions to this rule are:
The tax rules don't set an age by which you must start taking your pension, but your scheme may do so.
You don’t have to leave your job to start taking your pension. If your scheme rules allow it you can continue working after you've started your pension. But if you're under 55 you may have to leave your job to qualify to take your pension early.
You don’t have to use all your pension pot to provide your pension at the same time. For example, if your scheme allows it, you could take part of your pension and continue working, and then when you leave your employer start taking the rest of your pension. However you won’t be able to do this if you want to:
Taking your pension before you’re 55 using a protected pension age
Unauthorised payments from pension pots
The amount of pension you get and how you take your pension depends on what type of pension scheme you belong to. The information you need to give your pension scheme administrator and the information they’ll give you will also vary depending on the type of pension scheme you belong to.
Whichever type of scheme you belong to you'll probably get the chance to take a tax free lump sum.
Starting to take your pension before you're 75 will also trigger a test of the amount of your pension pot against the lifetime allowance.
You'll normally have a set expected retirement age. You may be able to start your pension earlier but you’ll often get a smaller pension to take account of the fact that it will probably be paid for longer. Your scheme administrator should contact you shortly before your expected retirement date telling you how much pension you're entitled to. You may be given the option to give up part of your pension to:
The amount of pension you'll get is based on a formula. Often your pension will be based on your final salary and the number of years you've been in the scheme. Another common type of pension is career average where your pension is based on a percentage of the salary you got each year you were employed.
With these scheme types your pension is based on how much pension you can ‘buy’ with your pension pot. How much pension you can ‘buy’ depends on various things, including your age, your health and annuity rates at the time you come to take your pension.
You'll have more options over how you can take your pension but your scheme doesn't have to give you all the options available under the tax legislation.
If the scheme is an occupational pension scheme you'll probably have an expected pension date. Your scheme administrator should contact you shortly before that date to tell you how much your pension pot is and how the scheme allows you to use it to 'buy' your pension.
For personal pension schemes you'll probably need to contact your scheme administrator to ask them to start paying your pension. At that point they'll tell you how much your pension pot is and how you can use it to 'buy' your pension. Personal pension schemes normally give you more options for taking your pension.
Understanding the lifetime allowance for pension schemes
Options when you take your pension
You’ll probably be given the option to take part of your pension savings as a tax free lump sum. Some schemes – particularly public sector schemes – will automatically give you a lump sum in addition to your pension.
In a defined benefits scheme you give up ('commute') part of your expected pension to provide your lump sum. For example you could be given £12 lump sum for every £1 pension given up.
In a money purchase or cash balance scheme the amount of any lump sum is taken off the pension pot that is used to provide your pension.
The maximum tax-free lump sum you can normally have is whichever is the lower of the following amounts:
You may be able to take a bigger tax-free lump sum if before 6 April 2006 you had the right to take:
You shouldn't 'recycle' your lump sum by using it to pay contributions to a pension scheme. If you do your lump sum will no longer be tax free.
Find out more about primary and enhanced protection
Technical guidance on recycling your lump sum
If your pension pot is small you may prefer to take it all as a lump sum rather than using it to get a pension, if your pension scheme rules allow this. There is a limit though as to how small your pension pot must be to do this.
Taking a small pension pot as a lump sum
Starting to take your pension and lump sum before you're 75 triggers a test of your pension savings against the lifetime allowance. If your total pension savings are more than the £1.5 million lifetime allowance you'll pay tax on the excess unless you have some form of lifetime allowance protection.
The scheme administrator is jointly responsible for paying any tax charge, so they need to identify any tax due. There is no set process for this. Before you start your pension they may ask you:
If you don’t give your scheme administrator the information they may delay paying your pension until they get it.
Once you're getting your pension your scheme administrator will give you a statement every year telling you what percentage of the lifetime allowance your pension and lump sum from their scheme has used up.
Understanding the lifetime allowance for pension schemes
Annual and lifetime allowance statements
Technical guidance on how to calculate the maximum tax free lump sum
