The Case for Letting Your Pension Grow
Leaving your pension invested after you become eligible to withdraw it can be one of the smartest financial decisions you make. Compound growth – where your returns generate their own returns – means even a few extra years can make a substantial difference to your pot size and your eventual retirement income.
Consider a £200,000 pension pot at age 55. If left invested with average annual growth of 5% after charges, it could grow to approximately £255,000 by age 60 and £326,000 by age 65. That extra £126,000 could fund several additional years of retirement.
| Age | Pot at 5% Growth | Pot at 7% Growth | Extra vs Taking at 55 |
|---|---|---|---|
| 55 (baseline) | £200,000 | £200,000 | — |
| 57 | £220,500 | £228,980 | £20,500 – £28,980 |
| 60 | £255,256 | £280,510 | £55,256 – £80,510 |
| 65 | £325,779 | £393,590 | £125,779 – £193,590 |
Growth figures are illustrative and assume no withdrawals and charges of approximately 0.5%. Actual returns will vary based on market performance and your chosen funds.
Higher Annuity Rates at Older Ages
If you plan to use some or all of your pension to buy an annuity, waiting pays off twice: your pot is larger and annuity rates are better. A 65-year-old typically receives 15–25% more annual income per £100,000 than a 55-year-old, because the insurance company expects to make payments for fewer years.
Inheritance Tax Benefits
Under current rules, pensions sit outside your estate for inheritance tax purposes. If you die before 75, your beneficiaries can inherit your pension pot entirely tax-free. Even after 75, they pay only income tax on withdrawals, not IHT. This makes leaving money in a pension an effective estate planning tool – though proposed changes from April 2027 may bring pensions into the IHT net.
The Case for Taking Your Pension Now
There are legitimate reasons to access your pension as soon as you are eligible, and delaying is not always the right answer.
You Need the Income
If you have stopped working or reduced your hours and need income to cover living expenses, your pension exists precisely for this purpose. Drawing a sustainable income from your pension is entirely reasonable, especially if you have no other income sources to bridge the gap until State Pension age.
You Want to Pay Off Debt
Using your 25% tax-free lump sum to clear a mortgage or other high-interest debt can be a sound financial move. If your mortgage interest rate exceeds the expected return on your pension, the guaranteed saving from clearing the debt may outweigh the potential (but uncertain) growth from staying invested. See our guide on overpaying your mortgage vs pension.
Health Concerns
If you have a serious or life-limiting health condition, accessing your pension earlier makes practical sense. You may also qualify for an enhanced annuity that pays significantly more due to your reduced life expectancy. In this situation, the value of enjoying the money now outweighs the mathematical benefit of compound growth.
Legislative Risk
Pension rules can change. The government has already announced plans to bring pensions within the scope of inheritance tax from April 2027. Future governments may change tax relief, increase the minimum pension age further, or alter allowances. Some people prefer the certainty of accessing their pension under current known rules rather than risking less favourable terms later.
The Middle Ground: Phased Access
You do not have to choose between taking everything or leaving everything. A phased approach lets you access some benefits now while keeping the rest invested. Common strategies include:
- Take tax-free cash in stages – Crystallise part of your pot each year to take the 25% tax-free element while leaving the rest growing
- Low drawdown with growth – Enter drawdown but only withdraw a small amount (e.g., 3%) per year, allowing the remaining pot to continue growing
- Partial annuity – Use a portion of your pot to buy an annuity covering essential bills, leaving the rest in drawdown for flexibility and growth
Key Factors in Your Decision
| Factor | Favours Taking Now | Favours Letting It Grow |
|---|---|---|
| Income needs | No other income source | Salary or other income covers expenses |
| Health | Serious health conditions | Good health, long life expectancy |
| Debt | High-interest debt to clear | No significant debts |
| Risk tolerance | Uncomfortable with market volatility | Happy to stay invested |
| Other pensions | This is your only pension | Multiple pots or DB pension |
| Estate planning | No dependants or IHT concerns | Want to pass on pension wealth |
| Tax position | Low-income year available | Currently in higher tax bracket |
What About Sequence of Returns Risk?
One important consideration for those in drawdown is sequence of returns risk. If you begin withdrawing during a market downturn, your pot can deplete faster than expected because you are selling investments at low prices. This risk is most acute in the early years of drawdown.
If you are considering entering drawdown, having a cash buffer equivalent to 1–2 years of income can help you avoid selling investments during downturns. Alternatively, keeping your pension invested and living off other savings during bad years protects your long-term pot.
Getting Help With the Decision
This is one of the most consequential financial decisions you will make, and it is worth getting it right. Everyone with a defined contribution pension is entitled to a free Pension Wise appointment from MoneyHelper. For personalised advice, an FCA-authorised financial adviser can model different scenarios based on your specific circumstances.