Many (although not all) providers of private and workplace pensions allow members to access their funds from the age of 55.
While it may be tempting to dip into these funds as soon as you’re eligible to, drawing from your pension could have certain financial implications and as such, it requires careful consideration.
However, new research by Legal & General reveals that 1 in 5 UK adults take a lump sum from their pension at 55, without fully understanding how this could affect their long-term financial plan. Moreover, 10% withdraw their entire pot as soon as they are permitted to do so.
Keep reading to learn about the rules on accessing your pension at 55 and discover the potential advantages and disadvantages of doing so to help you decide if it’s a good idea for you.
At 55, you can usually withdraw up to 25% from your pension pot as a tax-free lump sum
The normal minimum pension age (NMPA) is the earliest age most people can start withdrawing money from their personal or workplace pensions without incurring an unauthorised payments tax charge.
The NMPA is currently 55 for most people, but it will rise to 57 from 6 April 2028 (unless you have a Protected Pension Age or you’re retiring due to ill health).
When you become eligible to access your pension, you can usually withdraw up to 25% as a tax-free lump sum. However, the Lump Sum Allowance (LSA) caps your 25% at £268,275 (2024/25) – that’s 25% of the former Lifetime Allowance (LTA).
You may be able to take more than 25% tax-efficiently if you previously had a protected LTA.
If you choose to withdraw more than the LSA, you’ll be charged Income Tax at your marginal rate on the amount that exceeds this threshold.
Potential advantages of taking a lump sum from your pension at 55
Releasing some cash from your pension at 55 might offer certain benefits.
You could withdraw 25% tax-free
As described above, you can usually take a 25% tax-free lump sum from your pension when you reach the NMPA, provided this does not exceed the LSA.
For example, if your pension is worth £100,000 and you take out £25,000 (25%) as a lump sum, this would not be taxed as income in the same way that future withdrawals are likely to be.
Improve your work-life balance
Taking a lump sum from your pension might be a tax-efficient way to bolster a lower salary if you choose to reduce your work hours and retire gradually.
Indeed, a “phased” or “flexi” retirement could allow you to retain the emotional and financial benefits of working while improving your work-life balance.
Reduce or clear your debts
Holding significant or expensive debt can be stressful and might hamper your progress towards your financial goals.
So, you may want to use your tax-free lump sum to clear or reduce such debts.
Or perhaps you’re eager to enjoy the financial freedom of living mortgage-free. If so, you could use some of your pension funds to achieve this goal – just remember to check with your provider about early repayment charges.
Any remaining funds could continue to grow
Any funds you leave in your pension pot may continue to grow over time, especially if they remain invested.
As such, you could enjoy a portion of your savings at 55, while also having the peace of mind that your remaining pension funds remain invested for the future.
Freedom and flexibility
Withdrawing a lump sum at 55 could give you the freedom and flexibility to fulfil retirement goals – such as travelling the world – while you’re still young and active.
Alternatively, your priority might be to support your loved ones when they need it the most.
For example, you may want to work less so that you can spend more time looking after your grandchildren. Or you might be keen to help cover the cost of your grandchildren’s private school fees. Taking a lump sum from your pension could allow you to provide such support to loved ones.
Potential disadvantages of taking a lump sum from your pension at 55
There are several potential drawbacks to consider when deciding whether to take a lump sum from your pension at 55.
Running out of money in later life
According to the Office for National Statistics life expectancy calculator, on average, a man aged 55 today will live to age 84, while a woman aged 55 will live to age 87.
So, if you start drawing from your pension as soon as you’re able to, your retirement savings may need to last 30 years or more.
Even if you continue working full- or part-time, you’ll need to plan your finances carefully to avoid running out of money in later life. Consider that additional expenses, such as health care and medical costs might arise.
Loss of tax relief on future pension contributions
If you withdraw funds from a defined contribution (DC) pension, you could trigger the Money Purchase Annual Allowance (MPAA).
The MPAA means that you could only be able to contribute £10,000 a year into your pension tax-efficiently.
In contrast, leaving your pension untouched could protect your Annual Allowance, which is £60,000 in the 2024/25 tax year. As such, you could contribute up to this amount or 100% of your earnings – whichever is lower – tax-efficiently, until you reach the age of 75 (provided you don’t trigger the MPAA).
Missing out on potential future growth
Any funds you leave in your pension have the chance to grow in a tax-efficient environment.
Not only will your pension wealth be invested, but it could benefit from the powerful effect of compounding – reinvesting any returns made on investments. Compounding works best when funds are left invested over time. So, the longer your money remains in your pension pot, the more potential it has for future growth.
On the other hand, withdrawing a lump sum means you could miss out on any growth those funds might have made had you left them invested.
You might face a higher Income Tax bill
Any amount you withdraw from your pension that exceeds your tax-free allowance will be treated as income and added to your total annual income.
As such, withdrawing a lump sum could push you into a higher Income Tax band.
Indeed, IFA Magazine has reported up to 1.5 million pensioners could be dragged into higher- or additional-rate tax bands by 2030, due to the freeze on personal tax thresholds, which is set to remain in place until 2028.
Read More: How to keep your wealth tax-efficient when you move into a higher Income Tax bracket
Losing eligibility for means-tested benefits
Taking a lump sum could affect your eligibility for certain means-tested state benefits.
For example, if you’re below your State Pension Age – as you are at 55 – HMRC will take any funds you withdraw from your pension into consideration when calculating your entitlement to tax credits or housing benefit.
Get in touch
If you need help weighing up the pros and cons of taking a lump sum from your pension at 55, we’d love to hear from you.
To find out more, please get in touch. Email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Approved by Best Practice IFA Group Ltd on 20/03/2025