These days, you may have no option but to work for longer while taking money from your pension to make ends meet. Everything from energy bills, to petrol and food costs are rising, while inflation is currently at a 30-year high. Read more in our article What does inflation mean for my money? However, it’s important to remember that taking money from your retirement savings now could reduce your long-term pension income, leaving you with less to live on later in life.
There are several other drawbacks to consider, too. You’ll potentially lose a greater proportion of your pension to tax (more about this later), and increasing your earnings by supplementing them with money from your pension may affect your entitlement to certain benefits. Pension income is treated exactly the same as any other type of income you receive, so it’s subject to income tax at your marginal rate above your Personal Allowance (this is the amount of income you can receive each year before paying tax, and it’s frozen until 2025/26 at £12,570). Read more in our article How much tax will I pay when I withdraw my pension?
Depending on your circumstances, another downside may be that once you start withdrawing money from your pension, the amount you can pay into your pension and receive tax relief falls. Under current pension rules, you can pay up to £40,000 a year into your defined contribution pension, known as the Annual Allowance. However, once you start taking money out of your pension, this falls from £40,000 to £4,000, and becomes known as the Money Purchase Annual Allowance (MPAA). Learn more about these allowances in our article What is the Money Purchase Annual Allowance and How do pension allowances work?
There’s also the risk that by taking money from your pension now, you may not end up with enough to last you until you pass away. It’s worth getting to grips with roughly how much you might need to fund a comfortable retirement, and you can find out more about this in our article How much should I save for retirement?
However, you may have other income sources you can dip into as you move towards full retirement, such as money in individual savings accounts (ISAs) or from an investment property, for example, before turning to your pension.