Tax-free cash

Many pensions, including the Fidelity Self-Invested Personal Pension (SIPP), allow you to take up to 25% of your savings as tax-free cash at the age of 55.

Remember, the value of investments can go down as well as up and you may get back less than you invested. Eligibility to invest into a pension depends on personal circumstances and all tax rules may change.

You withdraw the pension lump sum and you can then do whatever you want with it. But there are a few important things to think about.

What you need to know

Tax-free cash in retirement

How it works

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.

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).

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.

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 invested 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 it through drawdown, and this will be subject to income tax.

If you take more cash than simply the 25% tax-free amount, or if you take multiple lump sums, then your annual allowance (the amount you can pay into your money purchase pensions each year and receive tax relief on) for any future contributions will drop from £40,000 to £4,000.

So take care if you plan to continue adding to your pension savings. Our Pension cash calculator can help you work it out.

* 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 UFPLS. The MPAA is £4,000. For more information please review our factsheet.

  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 use 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 UFPLS. The MPAA is £4,000. For more information please review our factsheet.

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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 final salary pension, call Fidelity’s retirement specialists on 0800 368 6882 to find out how our advice service can help you.

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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.

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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.

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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.