A lot of pension schemes have a great benefit where you can start withdrawing money from them once you turn 55 years old. This is usually a lot earlier than when you become eligible for receiving a state pension. If you start taking money from your pension scheme at the age of 55, you can reduce your working hours and top up your income with the money from the pension fund. You can also choose to retire early. However, that’s a different matter and in this post, we will discuss the scenario of taking your pension at 55 and continuing to work. Let’s get started.
Working after taking the pension at 55: Is it possible?
When is it ok to take money from your pension?
In the year 2015, some pension access restrictions were lifted and people were allowed to access their defined contribution pension from age 55 (this cutoff age is set to be increased to 57 by 2028). In case you possess a defined benefit pension, the rules might be slightly different for you. Check your pension scheme details to find out more about it. While accessing your pension pot at an early stage might seem very tempting from afar, you need to think thoroughly before you go ahead with it. Remember, your pension pot is there to finance the remainder of your life. If you eat too much into it too soon, you might face financial difficulties at later stages in life. Since the current life expectancy of 55 year olds in the UK hovers between 80 and 84 years, you will need your pension pot to support you for at least 25 years.
If I want to take my pension and continue working, what are the options available to me?
These are the options available for you in case you want to access your pension early while working:
Withdraw a part of your pension pot in cash and let the remainder stay invested
25% of your pension pot can be withdrawn in cash without any taxation. If you follow this method, you can get some money from your pension pot for immediate usage, while the rest will continue to rise over time. Using this approach can provide you with a lump sum that you could use to pay off your mortgage or other large debt. If you downsize your cash outflow in this manner, you can work for a reduced number of hours, while maintaining your current income levels.
Withdraw some of your tax-free cash and use the remainder to purchase an annuity
An annuity serves as an income source for life and you can get it in exchange for a lump sum. If you decide to purchase an annuity, your income will be fixed for life and your pension pot will not benefit from any future investment growth. In case you purchase an annuity at the age of 55, the income you receive will be a lot lower than what you would have received if you waited till the typical retirement age of 65.
Buy an annuity with your entire pension pot
While you can choose to do this, remember that the problem discussed in the point above will arise here as well. An annuity purchased at age 55 will provide less income than one purchased later.
Use pension drawdown to access your pension
You have the power to start accessing your pension from the age of 55. This also comes with a flexible option known as pension drawdown. In case you are planning to carry on with your work while accessing your pension pot, the pension drawdown is a good option for you. In the simplest of terms, a pension drawdown is like a pension tap that you can turn on and off. You can increase or decrease it based on your income needs. You will still have the option to withdraw 25% of your pension pot without paying any tax.
How are pension benefits taxed?
While accessing 25% of your pension pot is tax-free, any further income generated from it will be taxed at your marginal tax rate. If you take your pension benefits at age 55 and carry on working you will probably have already used up all of your current tax-free personal allowance of £12,500 (2020/21). In that scenario, all of your drawdowns will end up being taxed. If you pay your income tax through your employer at a higher rate (40-45%), you should try to earn a lower income or take less out of your pension pot so that you can come under the higher or upper rate threshold and reduce the amount of income tax that you have to pay.
Is it possible to contribute to my pension while taking pension benefits?
Yes, it is possible to do so. If you plan to take some pension benefits while continuing to work, you are still eligible to contribute to a pension up to the amount of your total annual income with a maximum contribution limit of £40,000 per annum. For example, if you earn £15,000 in a given year, that’s the maximum amount of money you can contribute to your pension fund and get some tax relief. This will continue to top up your pension pot, ensuring future growth to provide income later in life. Before you are about to reach the statutory retirement age, you will get a notice that will inform you about how to claim the Basic State Pension. In case you don’t act upon it, your pension will remain unpaid till you claim it. In case you choose to defer your state pension for a minimum of five weeks, you will be eligible for a higher pension when you claim it eventually.
What are the pros and cons of taking pension and continuing to work?
- You can reduce your working hours without sacrificing your lifestyle as the pension will offset the loss of pay at your full time job.
- You will have access to a tax free lump sum which you can then utilize to pay your mortgages and other debts off.
- You don’t have to stop working completely and you can continue to contribute to your pension fund.
- You can defer your state pension and take a much larger amount later.
- If you withdraw your pension early, it will reduce the value of your pension pot which you might need later in life.
- Depending on the average life expectancy at your age, you might run out of your pension much faster if you start withdrawing from your pension pot early.
Hopefully, after reading this post, you will have a clearer answer to your questions about accessing your pension pot at 55 while continuing to work.