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The tax-free pension lump sum at 55: Implications for employers and their people

15 April 2025
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More employees are becoming aware that they can access 25% of their defined contribution pension pot tax-free from age 55 (increasing to 57 in 2028).

For some, it represents a chance to pay off debts, reduce working hours, or make long-awaited lifestyle changes. But for employers, this growing trend presents both challenges and opportunities.

Recent research from Scottish Widows found that 78% of workers are taking their tax-free lump sum before their normal retirement age – underlining just how common early access has become.

As more people approach this milestone age, it’s important for employers to understand the implications for workforce planning, employee wellbeing, and the support structures that may need to evolve.

Why employees take the lump sum

Although many people still plan to retire in their 60s or later, age 55 has become a key financial moment.

Some employees may see it as an opportunity to:

  • pay off mortgages or other debts
  • bridge the gap to retirement
  • reduce working hours or change careers
  • help children with house deposits or education costs
  • access funds during times of financial pressure

Others may be encouraged by peers or family to ‘take it while they can’ especially if there is uncertainty about future rule changes. But while the appeal is understandable, early access isn’t without risks.

Implications for employers

Shifting retirement patterns

If employees use their lump sum to stop working sooner or scale back their hours, employers may face resourcing challenges. Succession planning may need to start earlier, and phased retirement models may become more relevant than ever.

Retention and motivation

Some employees may feel less financially dependent on work after withdrawing a lump sum. That can be empowering—but it may also lead to disengagement if individuals lose long-term motivation. Others may stay longer in work precisely because their financial situation becomes more flexible, especially if they’re able to reduce hours or shift roles.

Greater demand for flexibility

Employees taking a lump sum at 55 may not want to retire fully, but they might seek more autonomy over how and when they work. Employers with flexible working or phased retirement options are likely to be better positioned to retain experienced staff while supporting their evolving lifestyle goals.

Impact on pension contributions

Employees who access their pension pot could mistakenly believe they should stop contributing—or they may be caught by complex rules like the Money Purchase Annual Allowance (MPAA), which limits future contributions if income is also drawn. While the MPAA isn’t triggered by taking the tax-free lump sum alone, confusion is common and can have long-term consequences.

Risk of poor decision-making

Without access to financial advice, some employees may use the lump sum in ways that undermine their future financial security—such as investing inappropriately, giving large sums away, or using it for short-term spending. What starts as a financial opportunity can quickly lead to regret or stress later in life.

There’s also the very real risk of running out of money in retirement. The lump sum might provide a short-term boost, but it also reduces the size of the pension pot left to generate income later on. With increasing life expectancy, employees could find themselves relying on a much smaller pension for 30 years or more—especially if they’ve left the workforce earlier than planned.

How employers can support their workforce

Provide access to education and advice

Helping employees understand their pension options—and the potential long-term consequences—can lead to better outcomes. Many employers are now offering workplace financial education or signposting regulated financial advice as part of their wider wellbeing strategy.

Review flexible retirement policies

As employees take more control of when and how they retire, policies that allow phased or partial retirement can help organisations retain skills while offering staff the flexibility they want.

Equip line managers

Managers don’t need to be financial experts, but they should feel confident engaging in conversations about retirement plans and signposting employees to the right support. This is especially important when an employee’s financial decisions might affect team planning and performance.

Align benefits with later-life needs

Consider whether your wider benefits offering supports employees in their 50s and 60s. This might include tailored pension guidance, extended healthcare options, or flexible working arrangements that meet both business and personal needs.

Final thoughts

Accessing a pension lump sum at 55 can be a powerful moment of choice and freedom for employees. But without the right guidance, it can also lead to unintended consequences—both for the individual and the organisation.

Employers who understand the implications and support their workforce with thoughtful policies, education, and flexibility will not only help their people make better decisions but also build a more resilient, engaged, and future-ready business.

The information contained within this article is for guidance only and does not constitute financial advice

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