Why you should think twice before taking money from your pension

Middle aged woman wearing a red cardigan enjoying tea with friends

Pensions have always been considered long-term investments. And although financial pressures over the last year may have you thinking about dipping into yours, there are some things you should think about first.

By Seamus Walsh, Pension Guidance Expert

Seamus Walsh, customer engagement expert

Once you turn 55 — normally the earliest age you can start taking your pension — you may think you can protect your retirement fund by taking money out of your defined contribution pensions. 

But before you do, there are some things to consider when taking money from this type of pension.

Get to know how your money’s invested

We get it, pensions can be tricky to get your head around. And they may not be at the top of your priority list of things to sort out either. 

But unless you know how your pension’s being invested, you’ll have no way of knowing whether or not it’s a good idea to take money out of it. So having a good understanding of what’s happening with your money is key.  

The value could change again 

As with most investments, your pension value can go down as well as up and you could get back less than has been paid in. 

The two important numbers to think about when it comes to your investments are: 

  1. The price of your funds when you start investing in them
  2. The price they are when you decide to sell them

And although it's a good idea to keep an eye on your investments, it's worth remembering that you'll only make a profit or loss when you sell.

Let's say your pension value's gone down this year and you decide to take money from your pension now. If the fund value rises again, the amount you've taken out won't benefit from this. 

The thing to keep in mind is until you sell, you’ve not gained or lost anything. But once you do sell, you’re accepting whatever’s happened with your funds. 

It could affect how much tax you need to pay once you’re 55+

Like with any other income, there could be tax implications if you take money from your pension — particularly if you’re still working. 

You can normally take up to 25% of what’s in your pension pot, tax-free. The rest is taxed at your income tax rate for that year. 

And it may affect you being able to put money back into a pension in the future.

Remember, tax treatment depends on your individual circumstances and may change in the future.

There are other things you can do with your pension 

Taking money out of your pension isn't your only option. Below are a couple of other things you can do - but you should always research your options yourself to find out the risks and tax implications involved. 

If you'd like to speak to someone to find out about the options available to you, such as taking an annuity, mixing and matching how you take your pension or about any of the other options below, our experts are on hand to offer free pension guidance.

And if you’d like more tailored support about your retirement options, we recommend that you speak to a financial adviser. 

Switch your funds 

There'll usually be lots of funds available that invest in different areas, across several levels of risk. So you could leave your money in your pension and simply switch your funds to a risk level you're more comfortable with. Your pension provider may charge you to do this.

If you're investing in a higher risk fund that you're not comfortable with, you could think about switching to a lower risk fund instead. It could be that a lower risk fund invests in different assets or it’s invested into a mix of assets, but potentially with different shares to the ones you have now. The level of risk you want to take is entirely up to you. 

Before you make the switch, be sure to research the funds you're thinking about — and make sure you're happy with the risk involved to make sure it's right for you.

Drawdown on your pension

Once you’re 55 and over, you can take a little bit of your pension, without having to take it all. By choosing the drawdown option, you can take money as and when you need. The rest of your pension will carry on being invested — so its value could still rise or fall. 

Your pension, your choice 

Whether you decide to take your money out of your pension or leave it in there is completely up to you. Just keep in mind that if you start dipping into your pension now, there's no guarantee it'll last as long as you need it to. 

Now you have a better understanding of the impact of doing this, you can make a more informed decision about what you want to do next. 


About the author

Seamus Walsh

Seamus Walsh works as a Pension Guidance Expert within Aviva speaking with customers every day to help them organise their retirement.

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