Taking your whole pension pot as cash
Under rules introduced in April 2015 you can now take the whole of your pension pot as cash in one go if you wish. However if you do this, you could end up with a large tax bill and run out of money in retirement. Get advice before you commit.
- How it works
- Things to think about
- Tax you will pay
- Tax relief on future pension savings
- What happens when you die?
- Your other retirement income options
How it works
Did you know
Cashing in your pension pot will not give you a secure retirement income. If you’re thinking of doing this, get free guidance from the government’s Pension Wiseopens in new window service followed by financial advice.
To take your whole pension pot as cash you simply close your pension pot and withdraw it all as cash.
The first 25% (quarter) will be tax-free. The remaining 75% (three quarters) will be taxed at your highest tax rate – by adding it to the rest of your income.
Things to think about
This option won’t provide a regular income for you – or for your spouse or any other dependant after you die.
Three quarters (75%) of the amount you withdraw is taxable income, so there’s a strong chance your tax rate would go up when the money is added to your other income.
If you exercise this option you can’t change your mind.
For many or most people it will be more tax efficient to consider one or more of the other options for taking your pension.
Find out more at the end of this guide.
Taking a large cash sum could reduce any entitlement you have to benefits now, or as you grow older – for example to help with long-term care needs.
Cashing in your pension to clear debts, buy a holiday, or indulge in a big-ticket item will reduce the money you will have to live on in retirement, and you could end up with a large tax bill.
If you need to clear debts get specialist help – see Where to get free debt advice.
Not all pension schemes and providers offer cash withdrawal – if yours doesn’t shop around as charges will vary.
But get guidance or advice before you commit.
You might not be able to use this option if you have received a share of an ex-spouse or ex-civil partner’s pension as a result of a divorce, or if you have certain protected rights with your pension. Check with your scheme or provider.
Tax you will pay
Remember, three quarters (75%) of the amount you withdraw counts as taxable income.
It is highly likely this will increase your tax rate when added to your other income.
Your pension scheme or provider will pay the cash through a payslip and take off tax in advance – called PAYE (Pay As You Earn).
This means you might pay too much Income Tax and have to claim the money back – or you might owe more tax if you have other sources of income.
Extra tax charges or restrictions might apply if your pension savings exceed the lifetime allowance (currently £1 million), or if you have reached age 75 and have less lifetime allowance available than the value of the pension pot you want to cash in.
Tax relief on future pension savings
If the value of the pension pot you cash in is £10,000 or more, once you have taken the cash, the annual amount of defined contribution pension savings on which you can get tax relief is reduced from £40,000 (the Money Purchase Annual Allowance or MPAA) to £10,000 (MPAA).
If you want to carry on building up your pension pot this option might not be suitable.
Find out more about the annual allowance and money purchase annual allowance in our guide Tax relief on pension contributions.
What happens when you die?
Any remaining cash or investments from the money that came from your pension pot will count as part of your estate for Inheritance Tax purposes.
Whereas any part of your pot not used would not normally be liable.
Your other retirement income options
Taking your whole pot as cash could land you with a large tax bill – for most people it will be more tax efficient to use one of the other options. Get guidance or advice before you commit.
Cashing in your pension pot is just one of several options you have for using your pension pot to provide a retirement income.
Because of the risk of running out of money, we don’t recommend using this method to fund your retirement income.