How to turn your pension into money you can use

How to turn your pension into money you can use

Are you still working but want to know how to turn your pension into money you can use today, rather than waiting for retirement? Pension planning can be complicated, and the age for accessing your pension savings is rising. By 2028, you will need to be 57 before you can access income from your personal or private pension.

One of the biggest concerns around the “pension freedoms” back in 2015 was the risk of people using up their pension savings. Being able to access your money at the age of 55 requires some careful and thoughtful planning. If you want to use your pension savings before you stop working, you still need enough money to last you throughout retirement.

For many people, relying on the state pension alone is unlikely to provide the necessary level of income needed for a comfortable retirement. Some people may have underpaid their state pension, which is based on National Insurance (NI) contributions. Check your National Insurance record here:

Recently, the government announced an extension to the deadline for claiming any missed years or gaps in NI records. This is relevant to men born after 5 April 1951 and women born after 5 April 1953. If want to make up any contribution gaps in your state pension for tax years 2006 – 2016, this has been extended to 5 April 2025.

Using your pension income

Many people need to tap into their pension savings for different reasons before they stop work. You might want to fund your child’s university studies or give them a house deposit. You might want to take a mini-career break and travel. Or you might want to make alterations to your home. Whatever the reason, think carefully before using your pension savings.

Once you reach the necessary age for accessing your pension pot, there are different ways you can do this. Depending on your pension scheme, you can usually buy an annuity, take a cash lump sum or enter into a drawdown plan. If you were to withdraw all your pension income in one go, this would be very risky and likely to incur a high tax bill.

You can currently withdraw the first 25% of your pension income tax free. So, if you have a £150,000 pension pot, for example, this means you can take out £37,500 tax free. You could take cash out as and when you need it, leaving the rest to grow tax free. But you will need to be mindful of any limits and cash withdrawal charges relevant to your specific pension plan.

Guaranteed pension income

If you want to use part of your pensions pot, you could withdraw 25% tax free and then buy an annuity. This would convert the remaining money into a guaranteed income for life. You will need to carefully compare annuities in terms of features and options, as they will differ.

Ultimately, unless you need to use your pension savings, you could choose to leave your pension pot and use other available capital. Leaving your savings to grow tax free by delaying when you take your pension, should provide you with more income.

Keep contributing to your pension

Paying into a private or personal pension will help you build enough income to support you before and throughout your retirement. With some careful financial planning, you can draw from your pension income when you reach the necessary age. You can continue to contribute to your pension even after you retire.

As your contributions should receive a 20% top up from the government, this tax relief can go a long way. For every £80 you pay, £100 goes into your pension. If you are an additional rate or higher rate taxpayer, the benefits go even further.

If you’re a company director, speak to your financial planner to find out how pension contributions could reduce corporation tax by as much as 25%.

Greater flexibility, harder choices

Due to the pension freedoms, there is much more flexibility in how you can access and spend your pension savings. How and when you choose to use your pension income is one of the most important decisions of your life.

Whether you have one or multiple pensions, it’s worth checking whether your projected pension income matches your aims and aspirations. If you want to use your money while you’re still working, make sure you have enough income to support you in your later years.

Our financial planners can carry out a thorough pension review to see how much you’re likely to receive. We will look at whether there are better ways to manage your pension income, so you can make the most of your money. Our team will explain your options.

Do you need a pension review? Get in touch with our financial planning team.