Guide to taking your pension early and continuing to work
We reveal what you need to know about phased retirement and how to continue working part-time while drawing your pension.
You can usually draw from your private pension at the age of 55, making an early retirement possible – at least in theory.
Phased retirement is also an option, where you continue to work (probably fewer hours) while cashing in your pension.
Here are the issues to think about if you want to take your pension early and still work.
Can I take my pension early and continue to work?
The short answer is yes. These days, there is no set retirement age.
You can continue working for as long as you like and, from the age of 55, access most private pensions in various ways.
You may also be able to draw your state pension while continuing to work.
You can start receiving your state pension from the state pension age (currently 66 and increasing to 67 between 2026 and 2028) regardless of whether you choose to retire then or not.
If you wish, you can choose to defer your state pension if you don’t need the income yet, for an increased pension later on.
Is there a downside to taking my pension early and continuing to work?
The main drawback of continuing to earn money while drawing a pension is that you will lose more of the pension in tax.
All pension income is treated exactly the same as any other kind of income, so you’ll pay income tax on everything over your personal allowance. This will reduce some of the tax-saving benefits of having the pension.
Find out how much retirement income you might receive (before tax) from your private pension pot and how to boost it by using our Pension Calculator.
Another possible drawback is a reduced annual allowance. If you have started to draw on your pension but want to continue making contributions, then your annual allowance will be much smaller, likely falling from £60,000 to £10,000
It’s also worth being aware of allowances that apply after the lifetime allowance (LTA) was scrapped from 6 April 2024 and was replaced by three different ones:
- The lump sum allowance (LSA) lets you take 25% of your pension tax-free up to £268,275 from age 55.
- The lump sum and death benefit allowance (LSDBA) is £1,073,100 and includes tax-free lump sums and death benefits if you die before 75.
- The overseas transfer allowance (OTA) is £1,073,100 and is reduced by transfers to overseas pension schemes. You may be charged a 25% tax charge on anything transferred over this amount.
How much tax will I pay on my pension if I am still working?
The tax you pay on your pension will depend on how much you’re still earning.
All income above £12,570 (the annual allowance) is taxed at 20%, while all income above £50,270 (the higher rate tax band) is taxed at 40% (until you reach £125,140 – everything over that is taxed at 45%).
It’s also worth stressing the 60% tax trap that could apply for annual earnings between £100,000 and £125,140.
Any earned income will use up some or all of your annual allowance, exposing more of your pension income to tax.
Here’s an example:
Clare receives the full new state pension of around £11,502 and has an annuity that pays her £8,000 a year. She also makes £10,000 a year as a sole trader from her homemade jewellery business.
So, her total income for the year is £29,502. After her personal allowance of £12,570, this leaves £16,932 to be taxed at 20% – which is around £3,386.
Clare’s net income after tax is therefore £26,116.
State pension income | Annuity income | Earned income | Annual allowance | Taxable income (at 20%) | Income tax bill |
---|---|---|---|---|---|
£11,502 | £8,000 | £10,000 | (£12,570) | £16,932 | £3,386 |
If Clare took just £7,000 a year via her private pension, her tax bill would be £3,186, and her income after tax would be £25,316. This is only £800 less income, but she would have kept £1,000 in her pension.
This suggests that, in Clare’s case, she might be better off with a drawdown scheme rather than an annuity. With a drawdown scheme, she could keep her pension income lower while earning, saving money and tax, and then increase it when she stops working completely.
Do I pay National Insurance contributions on my pension income?
You won't pay national insurance (NI) contributions on your private pension income whether or not you've reached state pension age.
However, you will pay NI contributions on earnings from employment or self-employment that are over set thresholds unless you are over state pension age.
Learn more: National Insurance on pension contributions | How pensions are taxed
What are the advantages and disadvantages of drawing my pension while continuing to work?
Not everyone wants to stop work abruptly and move instantly into full retirement.
It is becoming increasingly popular to reduce your working hours (assuming your employer will enable this) and gradually transition into retirement. This can be better for your physical and mental health.
Similarly, you may want to leave your current job altogether but run your own business in retirement.
This is a very popular route for early retirees. There may be a money-making scheme you’ve been itching to try but have lacked the time or energy to pursue while working full-time.
Retirement can offer the opportunity to put your creativity to work without the need to support yourself immediately via your business as you’ll have your pension income available.
However, while partial retirement can offer a smoother transition into full retirement, there are some potential drawbacks to consider.
One significant disadvantage is the potential reduction in income, as working fewer hours usually means earning less money, which could impact your standard of living and financial stability.
Additionally, partial retirement might affect your pension contributions and benefits, potentially reducing the amount you receive.
Lastly, staying partially employed might limit your ability to fully engage in new hobbies, travel, or spend time with family, as work commitments still demand your attention.
If I’m phasing my retirement, how should I draw my pension?
You will need to talk to a financial adviser about the best way to access your pension. Everyone’s circumstances and needs are different, so no single route is suitable for everyone.
However, if you expect to receive other forms of income for a while (such as wages, business income, or rent from buy-to-let properties), you may choose to vary your income based on your changing needs.
This might make drawdown a more suitable option than an annuity, but discuss this with an adviser before making any decisions.
What are the other benefits of a phased retirement?
As well as making financial sense, easing into retirement can be better for your health and mental wellbeing.
Sudden lifestyle changes are usually stressful, even when they involve being under less pressure, and many people in early retirement miss the structure and purpose that working brings.
What’s more, working full-time doesn’t give you much time to think about retirement or get any real sense of what it might be like.
So, entering a partial retirement first may give you not only a valuable idea of what’s to come but also the time and knowledge you need to plan ahead for the real thing.
Remember, a financial adviser can also help a lot with the practical and personal sides of preparing for retirement.
Get expert financial advice
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However, pension planning can be complex.
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