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Releasing pension funds at 55

Chris Torney / 26 January 2015

The pension rules are changed in April 2015 and people have more freedom over what they do with their pension savings. What are the rule changes and what do they mean for you?

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Pension savers now have more choice

In general, savers can only start taking money out of their pensions once they turn 55 and they are usually obliged to turn the majority of their pension funds into an income.

But new rules give individuals much more freedom over what they do with their pension cash.

What were the previous rules?

Previously, pension savers were allowed to take up to 25% of their funds as a tax-free lump sum.

The rest of the money had to be used to generate an income in retirement: this is most commonly done by buying an annuity, which guarantees a regular income for the rest of the holder’s life.

Alternatively, the pension could be kept invested in a stock-market linked fund and regular income taken from it – this is a process known as drawdown, but until this year there were limits on how much income you were allowed to withdraw.

Find out more about the pension freedoms.

What were the old rules around small pension funds?

There were also rules that applied to smaller pensions: anyone with total pension pots of up to £30,000 could take the whole amount as a lump sum if they were 60 or over, but only the first 25% was tax-free.

The same applied to up to three separate pensions of no more than £10,000 each.

What are the new pension rules?

As of April 6 2015, savers have been given greater choice. They are still able to take 25% as a tax-free lump sum and use their remaining pension savings to buy an annuity.

But they are now also able to take the whole amount as a single lump sum, with the first 25% tax-free and the rest taxed at their highest rate of income tax – this can be zero, 20%, 40% or 45%, depending on what other income they receive in the relevant tax year.

An alternative is to take regular chunks of money out of the pension, with a quarter of each withdrawal tax-free.

Finally, the savings – minus a 25% tax-free lump sum, if the saver wishes – can be moved into a drawdown scheme. This means the money is invested in the stock market and other assets and pays a regular taxable income. Drawdown is now more flexible with no upper limit on the level of income taken.

What potential pitfalls are there?

There is a chance not all pension companies’ systems will have been set up quickly enough to cope with people who want to make regular withdrawals in the months immediately following the rule changes. Talk to your provider about what you want to do and whether they will allow you to do it.

Taking a large amount of cash out of your pension could push you into a higher tax bracket and lead to a much larger tax bill: you may pay less tax overall if instead you stagger your withdrawals over a number of years.


The opinions expressed are those of the author and are not held by Saga unless specifically stated. The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.