More than two in five over 55s unaware they can access 25% of their pension pot tax-free

by | Jun 6, 2023

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More than two in five (43%) over 55s are not aware they can take 25% of their pension pot tax-free, new research1 from Standard Life, part of Phoenix Group, reveals, highlighting a lack of knowledge which could result in people making ill-informed decisions when they access their pension savings.

The majority of those approaching the age when they can begin to access their pot are similarly unaware, with 52% of those aged between 50 and 54 oblivious about this rule too.

Making use of tax-free lump sum

Standard Life’s research also found that among the 57% of over 55s that do know they can access some of their pension without paying tax, 21% have done this already, while 9% plan to do so in future. 


Most over 55s that have taken or plan to take their tax-free lump sum did or will do so at the point of retirement (69%). In comparison, 16% have made or plan to make withdrawals at different points in retirement. 

Dean Butler, Managing Director for Retail at Standard Life comments: “When the time comes to take money out of your pension pot, it’s important to feel confident about your different options, and this includes understanding that you’re entitled to take 25% tax-free cash from your pot, either in one go or at intervals. Taking a tax-free sum from pension savings is a stage a lot of people look forward to, however, there are some key things to consider about how you take this – for example taking it all in one go or splitting withdrawals into chunks over a period of time – and the implications and benefits involved. 

“Whichever way you plan to take out your pension money, you need to think about tax, as there may be income tax to pay on any money you take out over your tax-free entitlement of 25% of the fund value. Being as clued up as possible, or seeking guidance or advice, will help you make the best decision for your circumstances and make the most of your well-earned retirement savings.”


Dean Butler answers key questions about taking tax-free cash:

How much do I get as a tax-free lump sum? “Most people will get 25% of their total pension pot tax-free (although this can change depending on the type of pension plan you have and if you’ve gone over your lifetime allowance). You’ll pay income tax on the remaining 75%.

When can I get my tax-free lump sum? “You can access your pension savings, including your tax-free lump sum, at the age of 55 (rising to 57 in 2028). In some cases, you may be able to access your pension earlier — if you’re in ill health or in a particular scheme with a protected age, for example — but these cases are rare and it’s more likely you’ll need to wait to the minimum access age.


Don’t be scammed

It’s also important to be aware of any company or scheme that promises you’ll be able to take your pension savings before you reach 55 – these are very likely to be a scam and you could lose your money.

Do I need to take it all at once? “This depends on the type of pension product you have and what it allows. In in most cases, you can take it bit by bit if you’d prefer. This can be beneficial for a couple of reasons. Firstly, the longer you leave your pension savings invested, the more opportunity they have to grow, and so taking all of your tax-free lump sum at once could mean you get less in your pocket over the long term than you would if you took it in smaller chunks. Secondly, taking your tax-free lump sum in chunks over time is a tax-efficient way of taking your pension savings. As you’ll pay income tax on the rest of your savings, using your tax-free lump sum as a way to supplement the taxable part of your income could mean that you pay less tax overall.


“Some people also choose to use their tax-free lump sum as way of reducing their working hours and starting a phased retirement. If you cut back on your hours, you could use some of your tax-free lump sum to top up your reduced salary.”

Should you take it immediately? “Your pension savings need to last you throughout your retirement – which could be longer than you might think. Taking too much at once, or taking them too early, could mean that you possibly run out of money later. Plus, leaving your pension savings invested for longer gives the opportunity for additional growth. So it can make sense for some people to put off accessing their savings for as long as possible.

Are there any implications to be aware of? “There are a few factors you should be aware of when deciding whether to take your tax-free lump sum. If you’re entitled to receive State benefits like Universal Credit or Pension Credit, you could lose your entitlement or it may reduce if you start accessing your pension savings. This is because your pension savings will count as a form of income or could be treated as capital, so it’s important to check you won’t be impacted by this before making any decisions. 


“In addition, taking a tax-free lump sum won’t affect the amount you can pay into your pension plan. Before you access any taxable income from your pension plan, the total amount you can pay in each tax year and still get tax benefits is £40,000, or your total salary, whichever is lower, and then you’d need to pay a tax charge for anything over this amount. However, once you do start taking taxable income, for most people this will reduce to £10,000 a year. This is a really important consideration when you’re working out plans for taking your retirement savings. Particularly if your plan is to keep working and paying in after you start to take your money.

How do I get my tax-free lump sum? “Depending on your provider, you should be able to do this online, over the phone or by filling out a form. Taking your pension money is a big decision and it’s important to think about getting financial advice before you do this or getting free guidance from services such as Pension Wise.”

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