For most people, their pension becomes available at the age of 55, rising to 57 by 2028, even if they plan to work past this point. It means you can access your pension while still working, providing flexibility. However, thousands may be doing so unaware that it could affect their pension contributions in the future.

Accessing your pension before retirement

Retirement planning means pulling together a lot of different information and understanding regulations. When you access your pension for the first time, it’s important to have a plan in place. The decisions you make when deciding to access your pension could affect your income for the rest of your life, so a long-term outlook is essential. You also need to consider things like how you’ll access your pension, tax liability, and if you have multiple pensions, which ones to use first.

If you’re planning to access your pension before retirement, there’s a risk that you may be caught out by the Money Purchase Annual Allowance. Doing so unwittingly could limit how much you’re able to contribute to pensions in the future and reduce tax efficiency.

What is the MPAA?

In most cases, you can contribute 100% of your annual earnings up to a maximum of £60,000 to your pension each tax year. You receive tax relief on these contributions at the highest level of Income Tax you pay. As a result, your pension receives an instant boost and makes saving for retirement efficient.

Please note, if your ‘adjusted income’ (your annual income before tax plus the value of your own and any employer pension contributions) is more than £260,000 per tax year, your pension Annual Allowance may be reduced by £1 for every £2 that your adjusted income exceeds £260,000 under the Tapered Annual Allowance rules. The MPAA reduces the amount you can tax-efficiently save into your pension each year. If triggered, your annual allowance could reduce to just £10,000.

The rules around the MPAA are complex but the main situations where it will be triggered include, withdrawing your entire pension, putting your pension money into a Flexi-Access Drawdown scheme and starting to take a flexible income, or purchasing an Annuity.

You can usually take a 25% tax-free lump sum from your pension without triggering the MPAA, depending on the rules of the pension scheme. However, it’s still important to fully understand the impact of this decision. Taking a lump sum early in retirement, or even before you retire, can have a significant impact on the income your pension will deliver.

Why does the MPAA matter?

The MPAA affects how much you can save tax-efficiently into a pension; this means it’s a particular concern among those who are still working.

If you access your pension at 55 but don’t plan to retire for another decade, the MPAA could significantly affect how much you’re able to contribute tax-efficiently to your pension in the next ten years. That means your pension pot can be far lower than expected, especially once you factor in tax relief and investment growth.

If you’re considering accessing your pension before retirement, it’s worth assessing the alternative options whether you want a lump sum or to supplement your income. Using savings or investments could make more sense and allow you to benefit from a higher pension Annual Allowance while you’re still working. There’s no one size fits all solution, so you should review your assets with your goals in mind.

You’ve spent your career saving into a pension to create an income that will deliver a retirement lifestyle you can look forward to. But taking too much too soon or being unaware of tax traps could mean the retirement that you’ve worked hard for and that promised much, doesn’t meet expectations.

Before you access your pensions, whether you’re ready to retire or not, it may be worth taking financial advice to provide you with the confidence that you’re making the right decisions.

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content was accurate at the time of writing, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means-tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.

FP2024-148. Last updated April 2024.