Taking your pension - the basics

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.

On this page:

When you can start to take your pension

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. This includes lump sum payments to cash in or unlock your pension fund.

The exceptions to this rule are:

  • if you retire due to ill health
  • if before 6 April 2006 you had the right under the pension scheme to take your pension before you're 55

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:

  • start taking your pension before you're 55 using a protected pension age
  • take more than 25% of your pension pot as a tax free lump sum because you had the right to do this before 6 April 2006

Ill Health and your pension

Taking your pension before you're 55 using a protected pension age

Unauthorised payments from pension pots

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Taking your payments

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.

Defined benefit schemes

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:

  • pay you a tax-free lump sum
  • provide a pension to any surviving dependant following your death

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.

Money purchase or cash balance schemes

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

Types of pension schemes

Options when you take your pension

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Taking part of your pension as lump sum

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:

  • 25% of the total value of the pension pot(s) from the same pension scheme that you're putting into payment. For example if you have money under two pension pots in the same scheme, say final salary pension and additional voluntary contributions, and take both pension pots at the same time, the 25% limit applies to the total of both pension pots. You could use one pension pot to pay the lump sum and the other to pay the pension if you wanted to
  • 25% of your remaining unused lifetime allowance based around the normal £1.25 million lifetime allowance unless you have:
    • fixed protection in which case use £1.8 million
    • fixed protection 2014 where your lifetime allowance is protected at £1.5 million
    • individual protection 2014 which will give you a protected lifetime allowance equal to the value of your pension rights on 5 April 2014 up to an overall maximum of £1.5 million

You may be able to take a bigger tax-free lump sum if before 6 April 2006 you had the right to take:

  • A tax free lump sum of more than £375,000 and you have either primary protection or enhanced protection.
  • More than 25% of your pension savings in that scheme as a tax free lump sum. This is known as 'scheme specific lump sum protection'. Your scheme administrator will be able to tell you if you can take a bigger tax free lump sum under this rule and the maximum lump sum you can have.

Recycling

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

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If your pension pot is small

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

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Lifetime allowance and your pension pot

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 £1.25 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:

  • for full details of any other pensions you have
  • to confirm that your total pension savings are less than the lifetime allowance

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

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Pension liberation - being approached to unlock or access your pension

Unscrupulous firms are using misleading information to promote personal loans or cash incentives and enticing savers to unlock their pension pots early. Very often these firms say there is a legal loophole they can use so you don't pay tax. There is no legal loophole. Find out more in the link below:

Pension liberation - the cost of accessing or unlocking your pension early

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More useful links

Technical guidance on how to calculate the maximum tax free lump sum

How your pension income is taxed

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