Late middle age is potentially a time of great change for many people. Some may have grown-up children who have either left the nest or are struggling to do so.
Others may have ageing parents with healthcare needs. Still others may have both.

And even if none of the above apply, there’s this realisation once we’re in our 50s and 60s that we’re headed towards something new – something daunting but potentially also exciting. Something we ought to try to shape. We may be more injury prone than we once were but, in many cases, we are also more asset-rich, less indebted and at the peak of our earning power.

So there’s a lot to think about.

In an earlier article, we spoke about the increasingly blurred lines between retirement and work as people aspire to new ways of living, encouraged by the pension freedoms available to them.

In this article, I want to explore a related subject – how best to continue saving during this transition. After all, withdrawing money from your pension doesn’t necessarily mean being retired – so it doesn’t preclude you from continuing to invest for your retirement.

If that sounds confusing, just remember that most of us are entitled to take money from our pension savings from as early on as aged 55 (rising to 57 in 2028). I say ‘most of us’ because it depends on whether your pension is of the ‘defined contribution’ (DC) kind or the increasingly rarer ‘defined benefit’ (aka ‘final salary’) kind1.

Crucial withdrawal threshold for DC pensions

Crucially, not only is the first 25% tax-free2 it also isn’t something you have to take in one go – not in the case of DC pensions. You can withdraw money in dribs and drabs, as required.

What’s more, if you take money solely from your 25% tax-free entitlement, you don’t trigger what is known as a ‘Money Purchase Annual Allowance’ (MPAA)3. This is important because it means you can continue saving up to £40,000 in your pension each year (as well as any unused allowance from the previous three tax years) – or up to 100% of your relevant4 earnings if you earn less than £40,000 – and gain tax relief on that money5

Go beyond the 25% threshold and trigger the MPAA, on the other hand, and that allowance is slashed to £4,000 per annum6. This includes employer contributions.

That is true whether you take more than 25% from just one pension pot7 or from all your different pensions, which is another good reason to consider having them all in one place – so you can see more clearly over your retirement finances and avoid making silly mistakes, including unnecessary paperwork8.

Why might it matter?

Why might triggering the MPAA matter? Because you want to ensure you can continue earning as much tax relief as possible on your future pension contributions so that you’re better able to fund the retirement lifestyle you want for yourself once you do fully retire.

Your actual retirement may still be many years away, after all, so you want to keep your options open in case your circumstances change.

But before then, there may be many reasons why someone in their 50s or 60s might want to tuck into some or all of their 25% tax-free pension entitlement – from paying down a mortgage to topping up income after a reduction in hours, from providing a house deposit to an adult son or daughter to helping to fund a rural cottage or urban flat that you can rent or retire to one day. Or you can use it to fund an extension to your home so that an elderly parent can move in or just to fund the holiday of a lifetime.

The possibilities are endless and will be very personal to you and your circumstances. You’ve reached one goal, now onto the next goal.

But if you’re still earning through your business or work, you will still need to plan your future finances and be ready for the next generation of potential contingencies.

Retiring fully from the workplace involves major tradeoffs. Aside from the obvious loss of salary, there are the potential mental health benefits of routine and camaraderie you could miss out on, plus benefits in kind, including private health insurance. It is not necessarily something to be rushed headlong into and with pension freedoms you have more options than ever before to try to manage the change on your own terms. 

In addition, this is a time in your life when you could inherit some money. If so, you’ll be glad to have somewhere tax-efficient to invest it. It’s more reason to stay on the right side of the MPAA.

The recycling question

Finally, some of you may be thinking: what’s to stop me using some of my tax-free pension withdrawals to make additional contributions to my pension and earn even more tax relief on top?

The main reason is because the government doesn’t want you to do that. It’s why the MPAA exists in the first place and why it was reduced from £10,000 in 2017 – to limit the extent to which you can recycle money within the pension system.

And it applies also to the tax-free portion of your retirement savings because if HMRC concludes that you have recycled money from your pension in this way, it could leave you facing a tax charge worth up to 55% of this payment.

The rules on whether you have made an ‘unauthorised’ payment or not are complicated and open to interpretation9, but they are more reason to plan your drawdown finances carefully.



1 All personal pensions, including self-invested personal pensions (SIPPs), and increasingly workplace pensions, are of the DC kind. 

2 The rest would be taxed in the same way your salary would be – subject to personal allowances and marginal rates of income tax.

3 This is true even if you put the rest of your pension pot into flex-access drawdown – or what we at Vanguard call flexible income (drawdown) – just as long as you don’t start taking an income from the pension. It’s also true if you take the tax-free cash lump sum and buy a lifetime annuity offering a guaranteed income for life (one that either stays level or rises over time). 

4 Your ‘relevant’ earnings exclude your pension income.

5 The way it works is that you pay up to £32,000 from your ‘relevant’ net earnings and get basic-rate tax relief paid automatically on top. And if you’re higher-rate taxpayer, you can claim back additional tax relief through your annual self-assessment.

6 Once an MPAA is in force, you can’t carry forward unused pension allowances from previous years either.  

7 The exception under current rules is if you cash in pension pots valued at less than £10,000.

8 Under current rules, if you trigger the MPAA in one pension, you have to let all your other pension providers know within 91 days or risk a penalty.

9 For more on the criteria see, the ‘Pensions tax manual’.

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Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

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