Which? uses cookies to improve our sites and by continuing you agree to our cookies policy.

Switching providers and consolidating pensions

Pension unlocking

By Paul Davies

Article 4 of 4

Put us to the test

Our Test Labs compare features and prices on a range of products. Try Which? to unlock our reviews. You'll instantly be able to compare our test scores, so you can make sure you don't get stuck with a Don't Buy.

Pension unlocking

Find out why accessing your pension early might not be a good idea. Discover the difference it might make to your retirement income.

People can now access their pensions from the age of 55, but accessing the money relatively early does carry some dangers. 

If you are in a final salary scheme, this usually involves transferring your fund to a personal pension first.

You can then take 25% of the fund as a cash-free lump sum, using the rest to buy an annuity or arrange income drawdown. Alternatively, you can take the 25% tax-free lump sum and leave the rest of your pension invested, ready to use in the future.

Go further: Company pensions vs personal pensions - we explain the key differences

What are the risks of accessing my pension early?

Taking your pension early (possible from age 55) means that you’ll receive a much lower monthly income if you opt for an annuity than if you waited until 65. While you'll receive a pension for longer, taking your pension 10 years early also means that you’ll lose out on those extra years of investment growth in your fund.

If your health deteriorates in the future, you won’t be able to buy an enhanced annuity (which pays more to those with a lower-than-average life expectancy) as you’ll already have spent your pension fund.

You might want to use income drawdown from the age of 55, via a pension or a Sipp, but the danger of running out of money will increase. 

Taking your pension early may also affect the level of state benefits to which you’re entitled, further reducing the appeal of unlocking.

Go further: Overview of options for cashing in your pension - your retirement options analysed

What difference will it make to my retirement income?

We calculated the pension income received by a man using a £200,000 pension fund to buy an annuity at 55 in the year 2000. We compared this with what would have happened if he had left his pension fund invested, buying an annuity at 65 in 2010 instead. 

Even with the stock market upheavals of recent years, the dramatic fall in annuity rates and without making any extra contributions, the initial pension received by the man at 65 is around double what he would have received at 55. So long as he lives to 75, he will have received more income in total by waiting until 65.

If you’re thinking about converting your pension, take advice from a specialist adviser. 

Go further: Choosing a financial adviser - tips on picking an IFA, including which qualifications to look out for

Alternatives to pension unlocking

If you’re over 55 and need to access a lump sum or extra income, make sure you explore all avenues before raiding your pension. These might include downsizing, sale of other assets, remortgaging, a short-term loan, and checking that you’re receiving all the state benefits and tax credits to which you’re entitled. 

Go further: Dealing with debt - This guide offers valuable advice to help those struggling to stay in the black.  

  • Last updated: January 2017
  • Updated by: Paul Davies

Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.