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.
Important information - please keep in mind that the value of investments can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. 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. You cannot normally access your pension until age 55.
What you need to know
The way you take your tax-free cash can depend on the type of pension you have now and how you might want to access your pension savings in the future.
How it works
You can take all or part of your tax-free cash with the other bit moving into ‘drawdown’. Or you can make lump sum withdrawals, with 25% of each withdrawal being tax free and 75% being taxed as earnings (this is called an Uncrystallised Fund Pension Lump Sum, or UFPLS for short).
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 at your marginal rate.
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 (known as the money purchase annual allowance; see below).
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.Pension tax calculator
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 and how this might impact any future contributions you may want to make. The table below shows you what happens to your annual allowance if you take more than your tax-free cash.
|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 (MPAA) 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 had earnings above £110,000 from 6 April 2016 the amount you can contribute and get tax relief on may also be lower than £40,000(down to £10,000). And if you have earnings above £200,000 from 6 April 2020 the amount you can contribute and get tax relief on may also be lower than £40,000 (down to £4,000).
You can find out more about tax relief and all the allowances in our pension allowances section.
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 £1.0731 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 that you can explore in our approaching retirement section.
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. Read about annual allowances.
Guides on taking tax-free cash
Your options for taking tax-free cash
Once eligible you can withdraw tax-free cash any time or leave it to be included in your retirement plan. Withdrawing small amounts over several years could make your overall income more tax efficient
The money purchase annual allowance (MPAA)
Find out how taking more than the 25% tax-free amount could affect your annual allowance.
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 retirement 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 retirement income and could save on costs.
If you're thinking about transferring a defined benefit (also known as 'final salary') pension, call Fidelity’s retirement specialists on 0800 368 6882, Monday to Friday, 9am - 5pm, to find out how our advice service can help you.Explore pension transfers
Ready to chat?
Simply get in touch to talk about your options in more detail
We can help
Decisions about tax-free cash may seem easy but there could be implications for your future income. Talk to one of our retirement specialists about your options. We’re open Monday to Friday, 9am - 5pm.Call 0800 368 6882
The Government's free and impartial Pension Wise service can help you understand your options at retirement. Visit their website or call 0800 138 3944.Visit www.pensionwise.gov.uk
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Important information: 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.