Pension withdrawals surge: 5 questions to ask before accessing your money

Pension withdrawals surged by 20% in 2023/24, with savers cashing out more than £52 bn, according to new data from the Financial Conduct Authority (FCA). 

If you're accessing your pension for the first time, it's important to carefully consider the long-term sustainability of your withdrawals and potential tax implications.

Here, we break down five essential questions to consider before tapping into your pension funds. 

1. When is the right time to access your pension?

The current minimum age at which you can access your pension is 55, rising to 57 in 2028. 

This is known as the 'normal minimum pension age', set by the government. But it’s not the same as your retirement age, which is when you choose to stop working. 

In certain circumstances, such as ill health or having a protected pension age, you may be able to access your pension earlier.

The number of pension plans accessed for the first time in 2023/24 rose by 20% to 885,455, likely due to the pressures of the cost of living crisis and rising interest rates. 

Before making a withdrawal, it’s essential that you carefully consider whether now is the right time.

• Find out more: how to plan for retirement.

2. Should you choose drawdown or an annuity?

According to the FCA, pension drawdown continues to be the most popular option, with nearly 280,000 savers choosing it in the 2023/24 tax year – a 28% increase from the previous year. 

Drawdown offers flexibility, allowing you to take money as needed while keeping the rest invested, but this method requires careful management to avoid depleting your funds too early.

Annuities, on the other hand, provide a guaranteed income for life and have experienced a significant rise in demand. Sales of annuities jumped by 39% to 82,061 in 2023/24, largely driven by higher interest rates.

You don’t have to choose one option exclusively. As Tom Selby, director of public policy at AJ Bell, explains: 'It's also important to remember that you can mix and match annuities and drawdown to suit your needs. 

'For example, you might choose to purchase an annuity to cover your fixed costs, retaining flexibility and the possibility of enjoying long-term growth with the rest of your pot. Equally, you could opt for drawdown in the early years of retirement, then convert your pot into an annuity later on, when you should get a better rate.'

• Find out more: options for cashing in your pension pot.

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3. How much can you afford to withdraw?

Since the 2015 pension rules changes, it’s been possible to take your entire pension fund as cash from the age of 55. 

According to the FCA, more than £52bn was withdrawn from pensions in 2023/24, which is a 20% increase on the previous year.

While it might be tempting to withdraw your entire pension in one go, it’s important to weigh up the risks. 

The first 25% is tax-free, but the rest is added to your income. This means it's subject to income tax and could potentially push you into a higher bracket. 

Not all pension providers offer this option and there may be charges for cashing in your entire fund.

• Find out more: taking a lump sum from your pension.

4. What are the tax implications?

It’s not just the risk of being pushed into a higher tax bracket that you’ll need to watch out for. 

If you plan to continue contributing to your pension, flexibly accessing taxable income from your pot will trigger the money purchase annual allowance (MPAA). This reduces the amount you can contribute tax-free from £60,000 a year to £10,000.

The MPAA is only triggered when you take a lump sum from your pension, known as an 'uncrystallised pension lump sum' or when you begin drawing an income through pension drawdown. 

To retain the full £60,000 annual allowance, you can take a 25% tax-free lump sum and either purchase an annuity or start a drawdown plan without taking an income. These rules can be complicated, so consider taking advice first. 

• Find out more: how the money purchase allowance works.

5. Do you need financial advice?

Only 30% of plan holders who accessed their pension for the first time in 2023/24 sought regulated financial advice, down slightly from 32% the previous year.

If you need help in choosing a pension or reviewing your retirement options, an independent financial adviser (IFA) may be able to help. IFAs are authorised to give you advice and recommend suitable pension products and investment options.

For free and impartial guidance, services such as Citizens Advice Bureau, Money Helper and Pension Wise (for those over the age of 50) provide valuable resources to help you make informed decisions about your pension.

• Find out more: how to get pensions advice and guidance.

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