I'm 55 and want to take £15,000 from my pension pot - can I do it tax free? STEVE WEBB replies
We did look at loans but they are so expensive. I have no plans to retire and am not thinking about it for the time being.
Would I be able to take that amount out and not pay tax on it? Does it effect the rest of my money, and can I carrying on paying into my pension/
I don't plan to take anymore out after this. My mortgage finishes in five years I will be looking forward to that.
Steve Webb replies: One of the big advantages of having a 'pot of money' type pension is that you now have a lot of flexibility about how and when you take it.
The potential to use your pension to enjoy this phase of your life is a positive thing and is a reward for the sacrifices you have made to build up the pot.
But there are various traps to be careful about which I will run through here.
It's probably obvious, but you always need to bear in mind that money you spend in your fifties is not going to be available to you in later retirement.
At that stage you will no longer have a wage coming in and may be heavily dependent on your state pension and remaining private pension pot.
Given that most of will have a longer retirement than we expect, it's important to be cautious in taking money out early.
One extra point to note is that the minimum access age for pensions (the so-called 'Normal Minimum Pension Age') is set to rise overnight on 6 April 2028 from 55 to 57.
This won't affect you, but it's something that other readers who are slightly younger than you may wish to consider. There's more information about this change in one of my earlier columns.
In terms of tax, there are several ways in which you can access your pension, and the tax treatment is different in each case.
One option is to move your pension pot into what is called 'flexi-access' drawdown.
With this route, you take a quarter of your current pot tax-free and then put the rest into a drawdown account where it goes on being invested.
You can then take further amounts out of that drawdown pot, though these are subject to tax when you take them.
To give an example, if you have £60,000 in your pension pot you could get £15,000 out tax free to spend on your camper van and travel, and leave the rest to be invested.
A second option is to move your pension pot into a different form of drawdown.
This is sometimes called drawdown in 'chunks' (or more formally 'uncrystallised funds pension lump sum' or UFPLS). In the case every chunk that you take out is 25 per cent tax free and 75 per cent taxed.
For example, if we assume you are a basic rate taxpayer, if you took out (say) £18,000 from such an arrangement, then you would get a quarter (£4,500) tax free and would pay 20 per cent tax on the remaining £13,500.
This gives you a tax bill of £2,700 and leaves you with just over £15,000 after tax.
A third option is to cash out a pot in full.
In this case you can take 25 per cent tax free but the rest is added to your taxable income for this year.
The problem with this is that if you also have a wage you could easily find that adding your 75 per cent of your pension on top takes you into a higher tax band and you will pay a lot of tax.
In terms of paying into your pension in future, there's no reason in principle why you cannot go on building up pension savings even if you have accessed some money for a particular reason.
However, the key issue you may face is something called the Money Purchase Annual Allowance (MPAA).
If you take money out of your 'pot of money' pension in a way that involves taking taxable income (e.g. if you go for flexi access drawdown and take more than your tax-free 25 per cent) then you trigger a much lower annual limit on the amount you can pay in whilst getting tax relief.
To be more precise, the normal Annual Allowance for tax-privileged saving is currently £60,00 per year, but the reduced allowance (the MPAA) is just £10,000.
This means that if you thought that you were likely to want to put more than £10,000 per year (including your employer contribution) into your pension – perhaps in a few years' time when you have cleared your mortgage - then you would need to make sure you avoid accessing your pension now in a way that triggers the lower limit.
You can read more about what does and does not trigger the MPAA here.
Finally, as you are aged 55 or over you can also contact the free 'Pension Wise' service to talk through your options before you make a decision and this would probably be a sensible thing to do first.
Ask Steve Webb a pension question
Former pensions minister Steve Webb is This Is Money's agony uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department for Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at pensionquestions@thisismoney.co.uk.
Steve will do his best to reply to your message in a forthcoming column, but he won't be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message - this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.
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