Are you thinking of accessing your pension whilst you are still working? Did you even know that you could?
Changes to pension rules over the last few years have made accessing your pension much easier and flexible.
There can be many reasons why it would be handy to access your pension whilst still working, but there is a right and wrong way to do it.
Do it the wrong way and you could be hit with a nasty tax bill and also limit what you can pay into a pension forever.
Why would you want to be accessing your pension whilst still working?
In this article, when we talk about accessing your pension, we are mainly talking about defined contribution pensions. The type where you can see a pot value if you log in to your account. They can be either workplace pensions or private pensions you have set up.
Providing you are aged over 55 (changing to 57 in 2028) you can now access your pensions any time you want. You don’t have to be retired and you can still be working.
Why could this be handy?
Well, you don’t have to take out all your pension in one go. You could take a one–off lump sum and leave the rest of the pension invested for a later date. This could be extremely useful if you have a smaller pension separate from your main pension, and that you don’t really need for your retirement.
Therefore you could take money out now to:
- Buy a new car.
- Gift money to the kids to help with a house deposit.
- Renovate your home.
- Invest into your new business.
These are just a few ideas.
Working part time or having a career break? By accessing your pension, you could top up your income.
What you need to watch out for when accessing your pension whilst still working
So you may already be aware that you can access your pension whilst still working but have heard something about paying tax on the withdrawals?
Well, to be clear. For most defined contribution pension arrangements, if you have yet to access your pension, up to 25% of your pension can be taken tax free (known as the pension commencement lump sum) and 75% will be subject to Income Tax at your marginal rate in the tax year you take the withdrawal.
The beauty of the new flexible rules mean you can take up to 25% of your pension pot now whilst you are still working and not pay any tax.
All sounds good so far?
Well unfortunately, most pension schemes are not set up to allow you to access just the tax free lump sum. Your pension provider may say they will allow you to take lump sums from your pension but this version of a lump sum is likely to be part tax free and part taxable. It’s known as an Uncrystallised Funds Pension Lump Sum (UFPLS). This is not what you want to do if you just want the tax free element of your pension.
If this is the case you will normally need to transfer your pension to an alternative pension scheme that allows Flex-Access Drawdown as this will give you the ability to take just your 25% tax free lump sum and leave the rest invested.
Now if you do decide to transfer your pension to a Flexi-Access Drawdown pension you need to be aware of the following.
#1 – You probably shouldn’t access your current workplace pension
Providing you haven’t opted out, your current employer will be paying into a workplace pension for you. This pension shouldn’t really be touched whilst you are still working for the same employer because if you do it will most likely end the free contributions from your employer.
If you want to access your pension whilst still working look at other pension pots you have built up from past employers.
Or perhaps look to see if your current workplace pension will allow a partial transfer that maintains the employer contributions.
#2 – Check additional benefits on older style pensions.
The older your pension is the more chance it might have valuable guarantees. Things like:
- A guaranteed pension income higher than you would get on the open market.
- A larger tax free cash option.
- Higher death benefits.
- Guaranteed investment returns.
Transferring a pension (in order to access it) with any of these benefits will result in the benefit being lost.
#3 – The Money Purchase Annual Allowance
If you were to end up taking out more than your 25% lump sum then you will likely be taking out some of the taxable part of your pension.
Whilst your other income might be low enough that you still don’t face much of a tax bill. it can have longer term consequences if you plan to carry on working.
Accessing your pension via UFPLS or taking some of the taxable part of your Flexi-Access Drawdown pension will trigger what’s called the Money Purchase Annual Allowance. This means that you will be limited in what can be saved into a pension going forward.
The new limit will be £4,000 per tax year and this limit applies to the total input for all of your pensions combined and includes employer contributions.
Even if you are comfortable with this new limit because you don’t plan to pay any more in, there is still a chance you could get caught by the auto enrolment rules. Meaning your employer always has to opt you into a pension scheme first and automatically collects pension contributions. You will need to ensure you are always opted out and miss the free cash from your employer.
So as usual, the complicated minefield of pensions is clear for all to see. This is why proper financial advice is essential. There are just too many traps waiting for you if you don’t know what you are looking for.
If you would like to discuss your pensions and how to access them efficiently please secure a free 15-minute video call with us. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
