Take all or part of your pension savings in cash.
The pension freedom changes introduced in April 2015 mean that those of us reaching 55 now have greater access and flexibility in terms of what we can do with our pension savings. Cashing in your pension (either all or part of it) in order to pay for something or to reinvest is not something that should be done without first understanding the options available and their associated benefits and risks.
Click on the tabs below to find out more about these main options if you are considering cashing in your pension savings.
1. Just take the tax-free cash
You can take a lump sum (usually 25%) from your pension pot tax-free. You don’t have to cash in the remaining amount straightaway, but when you do, it’ll be taxed as income in the year that you take it.
If you need cash but have already used up any personal income tax allowance with other earnings, this might be a good idea for you.
2. Take a “slice” of your pension
You’ll get 25% of the cash tax-free, with the rest being taxed as income. What’s left of your pension can be cashed in at a later date, with part of it still being tax-free.
You may want to do this if you need cash but have some unused personal income tax allowance.
3. Take the tax-free cash and a bit more
This is when you’ve got to think about the taxman. Only 25% of your pension pot is tax-free, so you may need to pay income tax on the rest.
If you’ve used up any personal income tax allowance with other earnings, this might be a good idea if you need more than your tax-free cash amount.
You can take a 25% lump sum from your pension pot tax-free, but the remaining 75% will be subject to income tax.
Cashing in all your pension savings at once may mean not only paying tax at your normal rate, but you could end up paying higher rates of tax. If you can, it might be worth considering spreading your withdrawals over several years to ensure you avoid this.
If you’re taking cash from your pension for the first time, then your pension provider may be required to apply emergency tax to the payment, which you may have to reclaim.
If you need a regular income, then taking cash from your pension savings now means there will be less to provide an income in the future. This might mean leaving you with no regular income other than the State Pension.
Any cash you leave in your pension pot stays invested, meaning you could be earning investment growth on that cash.
If you’re planning on taking a cash lump sum from your pension to pay off debt, then have a read about the things we think you need to consider when repaying debt.
You might be simply planning on putting the cash into a savings account but if there are low interest rates, will it be able to keep up with inflation? Choosing to invest your cash using, for example, a new ISA may be a good idea, but perhaps it’s also worth considering staying invested in your current pension plan.
You should bear in mind that not all pension providers will offer you the opportunity to take cash out of your pension. You may have to move to a different pension plan, such as the Fidelity SIPP and then arrange to access your savings, as and when you need to.
We’ll not charge you for taking a cash payment from your pension.
The Government's Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.
The value of investments can go down as well as up and you may get back less than you invested. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser. Eligibility to invest into a pension depends on personal circumstances and all tax rules may change. You will not be able to withdraw money from a pension until you reach age 55.