The potential perils of accessing your pension at 55

Reaching the minimum pension age and being able to access your retirement savings might mean new possibilities opening up. You may start thinking about giving up work, withdrawing a lump sum to pursue a goal, or using your pension to boost your regular income.  

It’s an exciting time, but it’s also important to evaluate your decisions and consider how they could affect your long-term plans. Indeed, spending too much too soon could lead to a shortfall later in life. 

Usually, you can access your pension from age 55 (rising to 57 in 2028). For many people, this milestone will come before their planned retirement date. 

Yet, January 2025 research from Legal & General suggests 1 in 5 people access their pension at 55. 

32% of those withdrawing from their pension at 55 said it was to cover essential expenses. However, 46% simply said they did so “because they could”. 

Worryingly, 27% of UK adults aged over 50 make decisions about their pension without seeking any advice or guidance. It could mean a significant proportion of those accessing their pension as soon as possible don’t fully understand the long-term implications it could have. 

If you’re thinking about withdrawing money from your pension, here are three potential risks to consider first. 

1. It could increase your risk of running out of money later in life

Pensions are often among the largest assets people own. So, it’s not surprising that some look at the value and believe they have enough to splurge. 

Yet, it’s important to consider why you’ve saved into a pension – to create financial security once you give up work.  

If you start accessing your pension at 55, you could be at greater risk of facing a shortfall later in life as it’s likely to need to last several decades. Indeed, according to the Office for National Statistics, the average 55-year-old woman will live until they’re 87. For a man of the same age, life expectancy is 84.

Even if you don’t plan to take a regular income from your pension straightaway, withdrawing a lump sum can have a significant effect on the value of your retirement savings. 

Your pension is normally invested with the aim of delivering long-term growth. Taking a lump sum could mean investment returns are lower than expected, which, in turn, may lead to a lower income when you retire. 

That’s not to say you shouldn’t access your pension at 55, whether you want to use the money to travel or start reducing your working hours. However, understanding the potential long-term implications of doing so and how it might affect your retirement lifestyle is important. 

2. You may face an unexpected tax bill

You can usually withdraw up to 25% of your pension without facing a tax bill, either as a lump sum or spread across multiple withdrawals.

However, if you exceed the 25% tax-free portion, your pension withdrawals may become liable for Income Tax. According to the Legal & General study, around a third of those accessing their pension at 55 are withdrawing more than 25%. 

The withdrawal above the tax-free amount would be added to your other sources of income when calculating your Income Tax liability. So, you might want to consider whether it would push you into a higher tax bracket and increase your overall tax bill. 

It’s also worth noting that if you receive means-tested benefits, taking a lump sum or income from your pension could affect your entitlement – something a quarter of people didn’t realise. 

3. It could limit how much you can tax-efficiently save in your pension

Accessing your pension might reduce how much you can tax-efficiently contribute to your pension each tax year. 

In 2024/25, the pension Annual Allowance is £60,000. This is the amount you can personally contribute while retaining tax relief benefits. However, you can only claim tax relief on up to 100% of your annual earnings. 

You can normally withdraw your tax-free lump sum from your pension without affecting the Annual Allowance, but if you take a flexible income, you might trigger the Money Purchase Annual Allowance (MPAA).

The MPAA is just £10,000 in 2024/25. As a result, it can significantly reduce how much you’re able to tax-efficiently add to your pension and it might negatively affect your retirement income. 

Financial planning could help you understand the effect of accessing your pension at 55

One of the challenges of understanding whether accessing your pension sooner is the right decision for you is that you often need to consider the long-term effects. 

Financial planning could help you see how accessing your pension at 55 might affect your long-term finances and review other options as part of a wider financial plan. If you withdraw some of your pension now, it could help you feel more confident, or you might decide an alternative option makes more sense for you.

If you’d like to access your pension, we’re here to help you calculate the potential long-term consequences and more. Please get in touch to arrange a meeting. 

Please note:

This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.