Can I cash in my pension before 55?
Updated: Nov 21, 2022
The short answer is yes. But it comes with complexity, potential hefty charges and, in the eyes of the law, defies the purpose of a pension.
You may be able to withdraw your pension before 55 if you meet specific criteria. For everybody else, taking money out of your pension if you’re under 55 is classed as unauthorised.
Pensions and the 55 age rule
Saving into a pension is designed with a key purpose – to provide you with money for your retirement.
And while anybody could choose to ‘retire’ from working whenever they wished, the government currently refers to the ‘State Pension Age’ as 66 years or later, depending on when you were born. This determines when somebody entitled to the UK state pension can start receiving their weekly pension payments.
But when it comes to other pensions, the law refers to another term called ‘normal retirement age’. And this specifies at what age you can take money from a private pension. That age is currently 55 years old for most private pensions.
What happens if I want to take cash from my pension before 55?
If you’re under 55 and meet certain criteria, you may be entitled to take your pension early.
Common examples include:
Being in poor health and unable to work
Having a terminal illness
Having a job that naturally comes with early retirement e.g. an athlete
Defined as ‘Early Release Rules’, eligibility may be determined by the pension provider’s specific rules, an interpretation of the law or a combination of both.
If you fail to meet eligibility and still withdraw money, it will be classed as unauthorised and you will face a penalty charge.
The difference between taking your pension before 55 and after 55
As soon as you reach 55, you can start withdrawing money from your pension, provided your pension provider’s normal retirement age is 55.*
25% of the value of your pension can be taken tax-free.
The remaining 75% is subject to income tax.
Withdraw from your pension before you’re 55 without meeting the eligibility criteria?
You will be charged up to 55% tax plus additional fees from the pension provider.
‘Pension before 55? 55% tax’
*Note that from 2028 the normal retirement age will rise to 57. So factor this into any pension planning you’re thinking about.
A company has told me they can get me access to my pension before 55
In short, companies like this are not serving your best interests. You will simply pay even more fees to them on top of the tax charge. In fact, a company like this may even be a scammer.
So be very careful dealing with any third party who claims they can help you access your pension early.
Alternative ways to take a lump sum of cash before you’re 55
If you’re in the fortunate position of being able to retire before turning 55, then it’s best to avoid an ‘eggs all in one basket’ situation i.e. having all of your money tied up in a pension.
Yes, pensions are a tax-efficient way of maximising your retirement income potential.
But spreading money across different accounts or ‘products’ can give you greater withdrawal flexibility on your money.
1) Emergency cash buffer
Everybody should have a bit of cash they can easily access. While interest rates on cash are terrible at the moment, keeping just enough cash aside for known future purchases/spending is good financial planning.
2) Invest in an ISA
An investment ISA (aka Stocks and Shares ISA), like a pension, is tax efficient.
However, you can differentiate the taxation of each by thinking of them like this:
A pension is taxed on the way out (when you withdraw your money)
An ISA is taxed on the way in (the money you put in usually comes from post-tax (or 'net') funds)
Effectively your investment ISA and pension could be formed of exactly the same investments (mine are). But having both just gives you a bit more flexibility. So if you’re investing heavily into your pension and think you might want to access some of it before you’re 55, then funnelling some of that into an ISA instead could be a better option.
Summary
The general rule is that you can’t access your pension before 55 with the same conditions as you can after you’re 55.
So think very carefully before cashing in your pension early.
It will potentially wipe out all the benefits of paying into it in the first place.
