Tax-free cash

Many pensions allow you, from the age of 55, to take up to 25% of your savings as tax-free cash.

However, there are a few important things to think about.

What you need to know

Different companies allow you to access your tax-free cash in different ways. The way you take it can depend on the type of pension you have now and how you might want to access your pension savings in the future.

Tax-free cash in retirement

How it works

With the Fidelity SIPP, you just move your pension into ‘drawdown’ and you can then take as much of your tax-free cash as you want. Or, you can make lump sum withdrawals, with 25% of each withdrawal being tax free and 75% being taxable (this is called an Uncrystallised Fund Pension Lump Sum, or UFPLS for short).

Taking cash from pension factsheet

Your options for taking tax-free cash

When you’re eligible to take your tax-free cash, you don’t have to do it straight away. You can leave the money where it is until you’re ready to create a plan for your retirement. You tax-free cash should be part of this plan.

This could mean taking it out in one go, taking it in smaller portions over several years (which could make your overall income more tax efficient), or even not taking it at all.

Calculator

Take care when taking out more

If your 25% tax-free cash isn’t enough, you can withdraw as much as you want alongside, but this will be subject to Income Tax.

If you take more cash than the 25% tax-free amount, or if you take multiple lump sums, then, for any future contributions, your annual allowance (the amount you can pay into your pension pots each year and receive tax relief on) could drop from £40,000 to £4,000. Find out more about this in our factsheet.

So keep this in mind if you plan to continue adding to your pension pots. Our Pension cash calculator can help you work it out.

Remember of course that your pension is intended to provide income during your retirement, so always think carefully about whether you really need to take that lump sum and, if you do, how much will be left in the pot.

  Your annual allowance
If you only take part of your tax-free cash £40,000
If you just take all your tax-free cash £40,000
If you take more than your tax-free cash £4,000*
If you take lump sums (using UFPLS) £4,000*

* This is called the Money Purchase Annual Allowance and it applies when you take money out using ‘pension freedoms’ - withdrawing taxable income from your pension through drawdown or lump sums (UFPLS). The MPAA is £4,000. Note that if you have earnings above £110,000 the amount you can contribute and get tax relief on may also be lower than £40,000 (down to £10,000).

You can find out more about tax relief and all the allowances here.

What to consider

You may take your tax-free cash before you retire; or while you continue working and contributing to your pension; or at the point of retirement.

Whatever your circumstances, here are some things you should consider:

  • Leave provision for income in a retirement that could last 20 years or more.
  • If the total of your pensions reaches £1.03 million, the lifetime allowance rules could see you facing unwelcome tax charges.
  • If you’ve changed jobs several times during your career, you probably have multiple pension pots. When you want to take your tax-free cash, this may be the time to bring your pensions together so you only have one pot to manage.
  • If you’re thinking about taking your tax-free cash, but haven’t decided how to use it you should consider keeping it in your pension pot.
  • Taking your tax-free cash is just one part of your retirement income plan. When you want to access more money from your pension you have a number of options.

If you want to continue saving into your pension after taking cash from it, there are some things to consider:

  • If you build up further tax-free cash that isn’t taken before you reach 75, your beneficiaries may have to pay tax on that money.
  • There may be a limit to how much you’ll be able to contribute in future and still get tax relief on (your annual allowance).
Couple holding tablets

Bringing your pensions together

Even if you’re only contributing to one pension, there’s a good chance you’ll own several more – particularly if you’ve changed jobs a few times during your career.

You can manage the income and the tax-free cash from each of these pensions separately, but it can be a lot easier if you bring them all together. Then you just have one company to deal with for every aspect of your income and could save on costs.

If you are thinking about transferring a defined benefit pension, call Fidelity’s retirement specialists on 0800 368 6882 to find out how our advice service can help you.

Laptop on a desk

Get some expert help

Decisions about tax-free cash may seem easy but there can be more to it than you might think due to implications for your future income.

Fidelity's retirement service has retirement specialists who are able to provide both guidance and advice around tax-free cash. The service we offer is based purely on helping you find the most appropriate solution for your personal circumstances.

Pension wise logo

The Government offers a free and impartial guidance service to help you understand your options at retirement. This is available via the web, telephone or face-to-face through government approved organisations, such as The Pensions Advisory Service and the Citizens Advice Bureau. You can find out more by going to pensionwise.gov.uk or by calling Pension Wise on 0800 138 3944.

Related articles

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.