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Should I take tax-free cash from my pension?

The cash lump sum that can be taken tax-free from retirement savings is one of the most popular features of the pensions system.

Usually available from age 55, it offers a potential cash boost as you approach retirement that can be used however you wish, be it to clear debt, help grown-up children get on the property ladder or perhaps even to pay for a dream holiday after a life of work.

The attraction of tax free cash is clear, but taking it isn’t always the right call. With as much as a quarter of your pension pot at stake - a pot that’s there to support you for the rest of your life - it’s important to take tax-free cash in a way that suits you best.

Here we run though some of the important questions to ask yourself before you take tax-free cash from your pension.

  1. Do you really need the money?

    Many pensions allow you, usually from the age of 55, to take up to a quarter of your savings as tax-free cash. But that doesn’t mean you have to take all, or any, of it. Remember - money that is spent now means there’s less left in the pot to generate an income through your retirement.

    If you don’t have a very good use for the money now, be aware that taking the money from your pension only to let it sit in a bank account could come at a cost.

    Once it’s in a bank account any returns it earns could be subject to tax whereas it would have grown tax-free in your pension. You may be able to re-home your tax-free cash inside an ISA to avoid this, but what you can pay in is limited, currently to £20,000 a year.

    What’s more, the bank deposit and ISA will be included in your estate for inheritance tax purposes, whereas it is exempt from inheritance tax while in a pension, and having additional assets in a bank or savings account may affect your ability to claim certain state benefits.

  2. Is this the only savings you have?

    If you have a specific need for money - to clear an expensive debt, for example - it can make sense to use non-pensions savings before you raid your retirement pot.

    As explained above, once you take your tax-free cash from your pension it becomes part of your estate and will also generally limit its ability to grow tax-efficiently in future (although invested money can fall in value too).

    If you have other savings, consider withdrawing from taxable savings first, then tax-free savings such as ISAs and then your pension. In this way you can ensure that you keep your pension, which is generally the most tax-efficient way of saving, sheltered from the tax man for as long as possible.

  3. You need some - but do you need all?

    You don’t have to take all of your tax-free cash at once. If your pension scheme supports it, you can access only part of your tax-free cash and keep the rest invested for later. This means you can continue to grow more tax-free cash for the future.

  4. Are you paying income tax?

    If you do not have enough other income to use up your personal income tax allowance (£12,500 for tax-year 2019/20) then it may make more sense to take more taxable withdrawals from your pension plan, and use less of your tax-free cash.

    Since April 2015, pension savers over 55 have been able to take their pension as a number of lump sums. Each time you take a lump sum, normally a quarter of it is tax-free and the rest will be taxed as earnings. You may need to move into a new pension plan to do this.

    For example, if you had £6,000 of unused personal allowance then you could take £8,000 from your pension as a lump sum in this way and still pay no tax - as £2,000 of your pension money is tax-free, while the remaining £6,000 is within your personal allowance. The advantage is that you keep more of your tax-free cash in your pension for the future.

    Accessing your pension in this way does then limit what you can save into a pension from that point onwards with tax relief continuing to apply. Read more about the Money Purchase Annual Allowance.

  5. Is now the best time to withdraw from your invested pension pot?

    If you don’t need the money right away and have some flexibility about when you take your tax-free cash, try to avoid taking it immediately after investments in your pension pot have suffered a heavy loss. 

    Don’t sweat over small market movements, but if there has been a big market fall you risk locking in those losses before your pot has had a chance to recover.

    If you have a very large pension pot, upward market movements might take your savings above the Lifetime allowance. This is the total amount you can build up in pension benefits over your lifetime while enjoying full tax benefits. If you go over the allowance you will generally pay a tax charge on the excess at some stage.

    Taking tax-free cash before you breach the limit can help avoid this.

  6. Could you get more than 25% tax-free?

    If you were in a pension scheme before 2006 then you may be able to take advantage of what is called protected tax-free cash. The rules are quite complex but could mean that you are entitled to more than 25% of your pension savings as tax-free cash.

    You should check with your pension plan provider to see if you are eligible. If you are you will probably need to provide earnings details from before 2006 to allow the pension provider to calculate what you’re due.

Get support with your plans

There are some big decisions to make at retirement. Our retirement specialists are on hand to help. You can call us on 0800 368 6891. We’re open 9am to 5pm, Monday to Friday. 

You may also want to contact the Government’s free and impartial Pension Wise guidance service which can help you understand your options at retirement. You can access their guidance online at or over the telephone on 0800 138 3944.


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Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Tax treatment depends on individual circumstances, and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. Pension and retirement planning can be complex, so if you are unsure about the suitability of a pension investment, retirement service or any action you need to take, please contact Fidelity’s Retirement Service on 0800 368 6891 or refer to an authorised financial adviser.