Can I take money from my pension plan and continue to work? | Standard Life (2024)

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Pensions

Can I take money from my pension plan and continue to work? | Standard Life (1)

Kirsty Kerr

March 19, 2024

4 mins read

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Want to know if you can start taking money from your pension but keep working and saving? The short answer is yes, you can. But here are some things to think about first.

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There are lots of reasons why you might want to take some of your pension savings while working and paying into your plan. Maybe you want to be able to afford to go part-time at work, pay off the rest of the mortgage or enjoy that holiday of a lifetime. Or maybe the money could help to support your children through school or university.

Whatever your reasons, it’s your money and your choice. Just be aware of these five things before you make your decision.

1. The minimum pension age is going up

Right now, most people can start to take money from their pension at age 55. But this will rise to age 57 from 6 April 2028, and it may change again in the future.

If you were born on or before 6 April 1971 then this won’t impact you. However, if you were born after 6 April 1971, this change could impact your plans if you were thinking of accessing your money at 55.

You can read our article to find out more about the change and how it might affect you.

2. There’s a limit to how much you can pay in

Every tax year you get a pension annual allowance. This is the total amount you, your employer and any third party can pay into your pension plans. It’s currently £60,000 or your total salary – whichever is lower. If you pay in more than this then you might face a tax charge.

However, once you start taking taxable money from your plan (that’s anything over your tax-free entitlement, which is usually 25% of your pot), then your annual allowance will reduce. It’ll go from £60,000 down to £10,000, which is known as the money purchase annual allowance.

The money purchase annual allowance more than doubled in 2023, going from £4,000 to £10,000. This change makes continuing to pay into your pension in retirement much easier than it was before, which is good news. But keep in mind the difference between £60,000 and £10,000 is still huge, and a really important thing to be aware of when you start taking your pension money.

3. It can still make sense to continue paying in

Despite the reduced allowance, paying into your pension plan can still make sense, whatever your age.

Your pension plan comes with a range of benefits to give you a helping hand when it comes to saving for your future – from tax relief on your payments to your employer paying in too. And those benefits stick, even when you start taking money from your plan. So continue to take advantage of your pension’s benefits where you can.

If you have a Standard Life pension and want to change your regular payments or make a new payment, you can usually do this online. Simply log in online or register for our online services if you haven’t already. Just keep in mind if you have a workplace plan with us, you might need to ask your employer how to change your payments.

4. There are pros and cons

Maybe the biggest thing to consider is whether you should actually take money from your pension at age 55 at all.

On one hand, the extra money could come in handy and, depending on your situation, could even be a bit of a lifeline. It could allow you to reduce your working hours, pay off debts or improve your lifestyle overall.

On the other, you could benefit from leaving your pension money alone for as long as possible; the longer you leave it invested, the more potential it has to grow. But remember, that's not guaranteed. Its value could go down as well as up and it's possible you could lose money.

It’s also important to think about how taking your money at 55 could impact your retirement in the future. For example, if you choose to buy a guaranteed income – also known as an annuity – that could give you a regular, guaranteed income throughout your retirement. However, the younger you are when you buy the annuity, the lower your yearly income is likely to be.

If you choose to take your money as a flexible income – also known as drawdown – you’ll be in control of how much you take and when. Keep in mind you won’t get your State Pension until your late 60s, so, with this option, there’s a possibility that your money could run out. You’ll need to carefully consider how much you’re taking now, and whether it could impact your quality of life later in retirement. Remember, people are living longer these days, so you may need your pension pot to last a while.

5. Get support or advice

Taking money from your pension is a big decision. So here’s a list of places and resources you can use to get help and support.

  • To help you get a better understanding of much you might need in retirement, read How much do I need to retire?
  • To find out what your retirement options are, contact your pension provider.
  • You can get free impartial guidance with Pension Wise, a service from MoneyHelper, if you're aged 50 or over. Go to their website or call 0800 011 3797.
  • You might want to take advice on something so important. If you don’t have an adviser, you can find one local to you at unbiased.co.uk.


The information here is based on our understanding in March 2024 and shouldn’t be taken as financial advice.

Laws and tax rules may change in the future and your own personal circumstances, including where you live in the UK, will have an impact on tax.


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FAQs

Can you cash out a pension while still working? ›

Collecting a pension while still working

Full pension payments while working: Some retirement plans let you start collecting a full pension at the retirement age defined by the plan, even if you continue to work for that company.

Can you go back to work after taking your pension? ›

Reaching State Pension age doesn't mean you have to give up work. You can continue working and still receive your State Pension. Find out about your options and the advantages of working longer.

Can I take money out of my pension? ›

Take cash lump sums

You can take your whole pension pot as cash straight away if you want to, no matter what size it is. You can also take smaller sums as cash whenever you need to. 25% of your total pension pot will be tax-free. You'll pay tax on the rest as if it were income.

How many times can you take from your pension? ›

There's no limit on how much money you can take out of your pension fund each year. The money in your pension fund needs to carry on growing to replace what you are taking out. So you'll need your fund to be wisely invested to make sure you don't lose out.

Does cashing out pension count as income? ›

If you receive retirement benefits in the form of pension or annuity payments from a qualified employer retirement plan, all or some portion of the amounts you receive may be taxable unless the payment is a qualified distribution from a designated Roth account.

Can you collect a pension and Social Security at the same time? ›

Can you collect Social Security and a pension at the same time? You can retire with Social Security and a pension at the same time, but the Social Security Administration (SSA) might reduce your Social Security benefit if your pension is from a job at which you did not pay Social Security taxes on your wages.

What happens if you continue to work after retirement? ›

You can get Social Security retirement benefits and work at the same time. However, if you are younger than full retirement age and make more than the yearly earnings limit, we will reduce your benefits. Starting with the month you reach full retirement age, we will not reduce your benefits no matter how much you earn.

Do I have to declare my pension lump sum? ›

Up to 25% of your Self Invested Pension Plan (SIPP) can be paid tax free. The remaining 75% will be chargeable to tax at your marjinal rate of Income Tax. As the lump sum is tax free, it does not need to be declared on a Self Assessment Tax Return.

What is the normal pension age? ›

What is my Normal Pension Age. Your Normal Pension Age (NPA) depends on which scheme your benefits are in. Your NPA for your career average benefits is either your State Pension age or age 65 whichever is the later date. Your NPA for your final salary is 60 or 65 depending on when you entered pensionable service.

Can I transfer my pension to my bank account? ›

For most pension schemes, it is not possible to access your pension until you are at least 55. You can, however, transfer to a new provider at any time. But if you're 55 or older, you can move your pension into your bank account. Even then, though, it is unlikely to be a good idea to take all of your pension in one go.

How much will I get if I cash in my pension? ›

Cashing in your pension just means taking all your savings in one lump sum. You'll usually get the first 25% tax-free and pay income tax on the rest. You can use the cash in any way you choose but you'll need to think about how to make the money last, and there may be other considerations too.

Can I cash out a pension before I retire? ›

You won't get the entire amount

If you take the money as a plan distribution before age 59½, you'll owe the IRS a 10% early withdrawal penalty. You'll also owe ordinary income tax in the year you receive the distribution.

How many years can you back date pension? ›

You can carry forward unused annual allowances from the three previous tax years, starting with the earliest which would be 2021/22. Claiming tax relief on pension contributions for previous years is relatively straightforward as long as you were a member of a pension during that time.

What happens to my pension after age 75? ›

If you die after 75, anyone who inherits your pension will be taxed on any income received as earnings under normal Income Tax rules. If your beneficiaries select to take money out through flexible retirement income (called 'pension drawdown'), they will only be taxed on any income they take each tax year.

How do I draw down my pension? ›

Up to 25% can normally be paid to you as tax-free cash, upfront, while the rest stays invested. You decide how much income to take (which is taxable), and when to take it. You can apply for drawdown with your current pension provider (if they offer it), or transfer your pension to a drawdown provider like HL.

What is the penalty for early withdrawal of pension? ›

Generally, the amounts an individual withdraws from an IRA or retirement plan before reaching age 59½ are called "early" or "premature" distributions. Individuals must pay an additional 10% early withdrawal tax unless an exception applies.

How much tax will I pay on my lump sum pension? ›

Mandatory income tax withholding of 20% applies to most taxable distributions paid directly to you in a lump sum from employer retirement plans even if you plan to roll over the taxable amount within 60 days. Note that the default rate of withholding may be too low for your tax situation.

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