Withdrawing entire pension pot early

Question

I have a small pension pot from an employer I started with in the last few years; it's around £15k which is entirely the employer's contributions.

I have had no other pension prior to this, due to being self-employed all my life and having invested in other ways. I am a long way from the 55 minimum withdrawal age.

I would like to withdraw this entire sum, as the cash is much more use to me now.

Although many sites online purport to advise you on this process, they actually all just say "DO NOT DO IT! You'll pay 55% tax! If someone told you to do this, it's probably a scam!" etc etc. It seems very difficult to find any straight-forward information on this scenario, either from government guidance or elsewhere.

My questions are:

1. How is the tax on such an action calculated? Is it simply counted as earned income, or is it in some other category?
2. Would the pension provider subtract the tax, or would it be my responsibility to pay it to HMRC?
3. How do I go about actually initiating the process to withdraw this sum?

Please avoid any "don't do it" type answers; I'd like to hear just the facts. Please presume I am happy to pay any level of tax on the sum.

Mod Note - OP is in the UK, Non-UK specific responses will be deleted.

Edit: I have found some further information - this would count as an "unauthorised payment": https://webarchive.nationalarchives.gov.uk/20140603101853/http://www.hmrc.gov.uk/pensionschemes/unauthorised-payments.htm

The following example suggests that pension providers may be willing to make these "unauthorised payments" and pass the cost to the customer: https://webarchive.nationalarchives.gov.uk/20140603161241/http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM04104831.htm

Answer 1

I do not believe there is any 'normal' scope for pension funds to be accessed before 55 (and this qualifying age is going up, too). When you joined the scheme, this should have been made abundantly obvious (although since none of your 'own' money was going in, this is less important). There's quibbling to be done over 'normal', but that's the headline.

Here's the UK government's PensionWise site on the subject:

You usually can’t take money from your pension pot before you’re 55 but there are some rare cases when you can, eg if you’re seriously ill.

...

If you’re ill

You may be able to take your pot before you’re 55 if you can’t work because you’re too ill.

Speak to your provider about the rules of your pension – it’ll depend on their definition of ‘ill health’.

If you’re seriously ill

You may be able to take your whole pot tax free if both of the following apply to you:

• you’re expected to live for less than a year
• your pots are worth less than the lifetime allowance of £1,055,000.

Here's the non-profit Money Advice Service on the subject:

Did you know?

You must have reached normal minimum pension age to access your pension pot – currently 55 (or earlier if you’re in ill health or if you have a protected retirement age).

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As you've discovered, any early access like this is categorised as an unauthorised payment, but it's not actually impossible if the scheme agrees to it. Given the associated taxes (40% or 55% liability to you, and a liability on the scheme administrator), I think you'll have trouble finding and/or transferring to such a scheme.

Bear in mind that when you do get to retirement age, you'll probably be able to take the whole pot tax-free under trivial commutation rules, so maybe just leave it?

Answer 2

This site seems to cover the high level information related to pensions in the UK. The short version is: your pension provider may or may not permit you to withdraw anything depending on your situation, so your first stop is to check your provider's policy. If they do allow you to withdraw, it appears to be taxed as normal income (with some caveats -- the first 25% withdrawn is allegedly tax-free) -- so you pay 0% on the first 12,500 of your income, 20% on income between 12,501 and 50,000, and so on.

Per the site above, your pension provider should withhold all necessary taxes (though they do mention you may be subject to more taxes at the end of the year -- they don't elaborate on why this might be the case). Similarly, your pension provider should furnish you with options for withdrawal if they allow it at all, given your specific circumstances.