0808 808 4000 Get help now
On this page
At a glance: Find out how taking money from your pension can affect you.
Reading time: 2 mins
This summary covers England and Wales
For a version of this summary that covers Scotland, please click here.

What does pension freedom mean?

You may be able to:

  • take up to 25% of the value of your pension as a tax-free sum.
  • take out more if you want to. If you do, you will pay income tax on what you take out over 25%.

What pensions are affected by pension freedom?

There are two main kinds of pension:

  • Defined contribution pensions.

    In this kind of pension, you pay into your pension and your employer might also pay into it.

    Defined contribution pensions are affected by pension freedom.

  • Defined benefit pensions.

    These are sometimes called ‘final salary’ or ‘career average’ schemes. This kind of pension pays you an income based on your salary and how long you have worked for your employer.

    Defined benefit schemes are not affected by pension freedom.

What happens if I take money out of my pension?

You might be thinking about taking money from your pension to help you sort out your financial situation. Before you do this, there are three important things to think about:

  • The impact on benefits

    Taking money from your pension may reduce the money you can get from social security benefits, now and in the future.

  • The impact on tax

    Taking money from your pension can affect how much tax you pay and the tax relief that you get. If you take more than 25% of your pension pot, you may have to pay tax on the part which is more than the 25% amount. This could give you a large tax bill.

  • The impact on your pension

    If you take money from your pension early it will be smaller when you retire. Weigh up the benefits of taking money from your pension now against keeping it for when you have retired, when you might also need it.

Using my pension to pay off debts

You could use money from your pension to help repay your debts, but you don’t have to. Whether this is a good idea depends on your circumstances. Before you do this you should get advice from a pension specialist or a financial adviser. This will normally have a cost.

MoneyHelper’s website page finding a retirement adviser has a directory of financial advisers who specialise in giving advice in this area.

Converting a defined benefit pension

If you have a defined benefit pension, some companies might suggest converting it into its cash value. This means you can put the money into a defined contribution pension and get pension freedom.

In most cases this is a bad idea. Usually, any advantages of transferring are outweighed by the costs, risks and loss of benefits. Again, seek help from a pension specialist or a financial adviser, although this will normally have a cost.

Learn more about this topic

If you want to learn more about this topic, you can read our in-depth guide.

Read in-depth-guide

Was this page helpful?

We're here to support you
However you feel comfortable, we can help you make a plan to take control of your debt.