Getting your pension early

You can choose to take all your pension savings in one go. This is called a lump sum. When you do this, you usually keep 25% of the money tax-free. You pay tax on the rest. But sometimes there is no tax to pay if someone is accessing it due to ill health.

You can also take money out as smaller lump sums. With this option, each time you take a smaller lump sum, 25% of the money is tax-free. The rest is classed as income that you may pay tax on. 

The lump sums that you pay tax on get added to your income for the year. Your income might include a job or other investments. Lump sum payments might push you into a higher income tax band. Usually, you can take out lump sums as often as you like. But there may be charges each time you do it, or limits on how often you can do this. Taking lump sums from your pension also means you will have less money when you retire. 

Income includes some state benefits. Taking lump sums may affect you getting means-tested benefits now or in the future, so you may want to check before deciding what to do. 

When you take lump sums, it can affect how much you can pay into your pension in the future. It affects your annual allowance. This is the amount you can pay into your pension each tax year and still get tax relief. In most cases, if you take lump sums, the amount you can pay into your pensions will be reduced to £10,000. This is called Money Purchase Annual Allowance (MPPA).

You can choose a pension scheme that gives you the option of a regular income. You can take 25% of your pension tax-free and then leave the rest invested in drawdown. You can then take money out when you need to. Any lump sums or income you take from drawdown will be taxed. The money you take out gets added to your income for the year. 

When you move your savings into a flexi-access drawdown fund, you can take up to 25% of your pension savings as a tax-free cash lump sum. Any lump sums or income you take after that will be taxed.

Your income might include a job or other investments. This might push you into a higher income tax band. You can change the amount it pays you over time. This option is called flexi-access drawdown. 

Not all pension schemes offer flexi-access drawdown. It might be possible to change to a provider that does offer this option, but you may have to pay a fee. You should also check that you will not lose any other features of your current plan.

Flexi-access drawdown is not guaranteed, as you may run out of money. This can happen if:

• you take out too muchtoo soon
• you live longer than you have planned for
• the investments in your pension do not perform as well as you thought.

Income includes some state benefits. Taking money from flexi-access drawdown may affect you getting means-tested benefits now or in the future. You may want to check before deciding what to do.

Flexi-access drawdown can affect how much you can save into your pension in the future. It affects your annual allowance. This is the amount you can pay into your pension each tax year and still get tax relief. If you choose to take money out of your flexi-access drawdown, the amount you can pay into your pension will be reduced to £10,000. This is called Money Purchase Annual Allowance (MPAA).

An annuity gives you a regular, guaranteed income for after you retire. They are sold by insurance companies. You can buy an annuity with some, or all, of your pension. It can give you an income for the rest of your life or for an agreed number of years.

When you buy an annuity, you can take 25% of your pension as a tax-free lump sum. Then you pay tax on the income you get from the annuity. The money you get depends on how much is in your pension and what you want the income to be over time. 

If you have or have had cancer, you may be able to get an enhanced annuity. These are for people with health conditions or lifestyle factors that could reduce their life expectancy. An enhanced annuity generally pays out more than other types of annuities. 

Unlike flexi-access drawdown, you cannot run out of money with a lifetime annuity. The income is guaranteed for the rest of your life. But you need to decide if it is right for you. It might depend on the rate of income you are offered. You may need to think about how long you think you will live, or if you can choose what will happen with it after you die. 

Your current pension provider may offer you their own annuity policy, but you need to consider if it is right for you. You can buy annuities from other providers. This is called the open market option. 

Visit MoneyHelper for information on how to find the best annuity product. MoneyHelper has an online tool that might help when looking for annuities.

Below is a sample of the sources used in our pensions and cancer information. If you would like more information about the sources we use, please contact us at cancerinformationteam@macmillan.org.uk

MoneyHelper. Pension drawdown: what is flexible retirement income? Available at: www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/what-is-flexible-retirement-income-pension-drawdown (accessed March 2023)

MoneyHelper. Guaranteed retirement income (annuities) explained. Available at: www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/guaranteed-retirement-income-annuities-explained (accessed March 2023)

GOV.UK. Early retirement, your pension and benefits: State Pension. Available at: www.gov.uk/early-retirement-pension (accessed March 2023)

This information has been written, revised and edited by Macmillan Cancer Support’s Cancer Information Development team. It has been reviewed by expert medical and health professionals and people living with cancer. It has been approved by Louise Dinsdale, Service Knowledge Specialist – Financial Guidance Team.

Our cancer information has been awarded the PIF TICK. Created by the Patient Information Forum, this quality mark shows we meet PIF’s 10 criteria for trustworthy health information.