Whether you’ve been saving for years, or are only just starting, it’s always useful to know when you can move your pension into drawdown. Typically, when, and how, you can take your money out will depend on the type of pension you have as well as your financial situation and goals. Here’s when you could start withdrawing your hard-earned money.
When can I move my state pension into drawdown?
If you’re living and working in the UK, you should be able to claim a state pension. If you’re employed and earn over £166 a week, then your company should be paying national insurance contributions out of your salary – these will vary depending on how much you earn. In order to get any state pension, you’ll typically need 10 years’ worth of contributions – if you don’t meet this 10-year minimum, you may not get any money. And, if you want to receive the full state-pension, which is currently set at £9,100 a year, you’ll need to pay contributions for 35 years1. But remember that the actual amount you get depends on your national insurance record, so there’s a chance you may receive less. If you have any gaps and worry about not having enough years of contributions to get the full state pension, it could be worth checking whether you’re eligible to pay voluntary contributions on the HMRC website.
If you’re eligible to claim a state pension, you’ll only be allowed to access your pot once you reach your pension age – this is the earliest age you’ll be able to receive your state pension. This age is worked out based on your date of birth and gender. HMRC lets you calculate your pension age on their website, it’s worth having a look. As a rule of thumb though, currently, you can claim your pension from the age of 65. However, since we tend to live a bit longer, the pension age is set to increase in the future. It is set to rise to 66 by October 2020 and 67 between 2026 and 20282.
Your state pension won’t be claimed automatically, you’ll need to do it yourself. Two months before you reach your pension age, you’ll receive a letter that will tell you what to do.
When can I move my workplace pensions into drawdown?
If you’ve been paying into a workplace pension, you’ll need to check the rules of your pension scheme to know when you’re able to take money out. But typically, most pensions will let you dip into your pot when you turn 55. Like many Brits, you may have had many jobs and contributed to different workplace pensions, and you may not remember where all your pots are! That’s fine, it actually happens a lot, but it’s important to try and locate your pensions, so you know how much you’ve got saved, and when you can withdraw. If you’ve lost track of your pots, the HMRC website will help you find them – all you need to do is answer a few questions and you should hopefully lay your hands on any lost pensions. Also, to make things easier for you, once you know where your pensions are, why not bring them all into one simple scheme? That way, you won’t get confused with lots of different providers and dates.
Before taking any money from your workplace pension, try to make the most of it. Currently, you have to contribute at least 5% of your salary and your employers pays a minimum of 3% of your pay. But if you wanted to, you could review your contributions and decide what works best for you.
When can I take money from my personal pension?
It’s not always well known, but when you’re saving for retirement, you can open a personal pension, also known as SIPP (Self-Invested Personal Pension). So, what is it, and when can you start withdrawing money? Well, a personal pension is designed to give you control and flexibility over your retirement pot, as you can make your own contributions. What’s more, with a personal pension, you can invest without having to pay UK tax on your profits, and you’ll receive a 20% tax relief from the government – think of it as a little incentive to encourage you to put money aside for your retirement. The 20% tax relief is also a way to compensate for the income tax you’ve already paid. For instance, if you’re a basic payer, you typically need to pay 20% tax on your income, so if you earn £1,000, you should be left with £800. Now if you decide to put this money in a personal pension, the government will give you £200, bringing the total value of your pension to £1,000 – if you do the maths, that’s a 25% top-up for each contribution you make. One thing to note is that you’ll only be able to enjoy the tax relief on £40,000 a year (or 100% of your earnings, if they’re lower).
You won’t be able to access your money until you turn 55, but you’ll still have the possibility to pay into your pot until your 75th birthday. Once you’re 55, you’ll be able to take up to 25% of your money as a tax-free lump sum. The way you take your funds out will depend on the pension scheme rules. Some pensions will pay out a specific income for life which will increase each year – this is known as ‘defined benefit pensions.’ Other pensions are ‘defined contribution schemes’ and they’ll let you choose how to withdraw your money, whether it’s taking your whole pension in one go as a lump sum, taking out money when you need it, or getting paid a regular income based on your pot size.
Having the option to withdraw money at the age of 55 is a good thing, but it could be worth waiting a bit before taking your money out. This is because the longer you hold onto your pension pot, the more potential your money has to benefit from ‘compounding’ – provided the environment is positive. What is compounding, you ask? As you make profits (or dividends) and reinvest them, you’re giving your money more potential to grow. In other words, your profits could generate further profits, and over the long-term it could add up and your pot could grow exponentially. In fact, the longer you invest, the more powerful compounding could be. Here are some examples to illustrate the magical effect compounding could have on your money.
Say you’re 30 and open a personal pension to give your retirement pot a boost. If you decide to put £7,000 in your pension, at the age of 55, you could get about £20,6963. But if you wait until your 65th birthday to take the money out, your pot could grow to £32,400 – that’s almost a £12,000 difference4. And if you make monthly contributions, the difference would be even larger as you would feed your pot for longer.
How to open a personal pension, or SIPP?
Opening a personal pension can seem like a daunting task, but what if we told you there’s an easy way to get started? With digital investment platforms, like Wealthify, you can open your pension with just a few taps. Simply choose how much you’d like to invest – with Wealthify, you can start your pension with just £50 - then, select the risk level that suits you. You can be Cautious, Adventurous, or somewhere in between, it’s up to you. We’ll do the hard work, from building your Plan, to managing it on an ongoing basis.
Whether you’re at the beginning, middle, or end of your pension journey, our pension calculator can help you understand what your finances could be like in retirement.
References:
1: https://www.gov.uk/new-state-pension/what-youll-get
3: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £12,236. If markets perform better, your return could be £36,720. Values correct as of 23/04/20.
4: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £15,451. If markets perform better, your return could be £69,359. Values correct as of 23/04/20.
Useful links:
Check your pension age: https://www.gov.uk/state-pension-age
Find your lost pensions: https://www.gov.uk/find-pension-contact-details
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
