Save, make, understand money


More than two in five over-55s unaware of tax-free pension pot portion

John Fitzsimons
Written By:
John Fitzsimons

Many pension savers do not realise they can access 25% of their pension pot without having to pay tax on it.

That’s according to a new study from Standard Life, which found that 43% of over-55s are not aware of the tax-free lump sum. This lack of awareness grows among those approaching the age at which they can begin to access their pot, with more than half (52%) of those aged 50-54 in the dark about it.

Of those over the age of 55 who do know that they can access some of their pension without paying tax, just one in five (21%) have done this already, with almost one in ten (9%) planning to do so in the future.

Two-thirds of those who have or are planning to do so will take their lump sum at the point of retirement, while 16% intend to make withdrawals at different points in retirement.

One lump sum or in stages?

Dean Butler, managing director for retail at Standard Life, said it was important to understand that savers are entitled to access their cash either in one lump sum, or in stages.

He continued: “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.”

How does the tax-free pension cash work?

Savers can choose to take all of that 25% in a single payment, or access it gradually. Income tax will be paid on the remaining 75%.

Butler explained that it can be taken out at 55, though this will rise to 57 in 2028. While there are some occasions when it can be accessed earlier, such as if you’re in ill health, this is relatively rare.

In fact, the supposed ability to get your hands on your pension cash early is a common tactic employed by pension scammers, trying to convince people to move their money into accounts controlled by the fraudsters themselves.

Butler pointed out that pension savings need to last the entirety of a retirement, which may be longer than savers expect, and so should discourage them from taking out too much at once.

The process for taking out the cash will vary by provider, and so savers may be able to do this online, over the phone or by filling out a postal form.