Blog » Should you cash out your pension early? Key questions to ask yourself first

Should you cash out your pension early? Key questions to ask yourself first

March 20, 2024
The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.

You’ve been diligently paying into your pension for years. Now you’re approaching the minimum pension age of 55 and wondering – should I cash in my pension early?

It’s a big decision. On one hand, having a large lump sum of cash can help with any immediate financial needs. But on the other, prematurely dipping into your pension will  leave you worse off in retirement. 

There are pros and cons either way when weighing up whether to cash in your pension pot early. To help decide if it’s right for you, here are some key questions to ask yourself first. 

What type of pension do I have?

The first thing to establish is what kind of pension you have. In the UK there are broadly two types – defined benefit (DB) schemes and defined contribution (DC) schemes. 

DB pensions, often called final salary pensions, provide guaranteed income in retirement. If you have this type of workplace pension, you generally cannot cash it in directly. You would first need to transfer to a DC pension to access funds flexibly. 

DC pensions have a pot of money built up from contributions and investment growth. Most modern workplace pensions and personal pensions are DC schemes. It is typically only DC pension pots that can be cashed in from age 55 onwards. 

Before considering cashing in, check your latest pension statement to confirm what type of scheme you have. This will determine the options available to you. 

What are my retirement income needs? 

Cashing in your pension early means reducing future retirement savings. So, think carefully about how reliant you’ll be on this money to maintain your desired lifestyle later in life.  

Make some realistic estimates around your basic living costs in older age plus any travel plans, one-off purchases or other spending priorities you may have. Then assess how essential your current pension pot is towards meeting these goals. 

If you’ll have little other income except the state pension, accessing your pension now could severely impact your standard of living down the track. Make sure you fully understand the long-term implications before withdrawing funds early. 

What is my purpose for cashing in?

You might have a specific reason motivating you to cash in your pension early, like: 

  • Paying off debts 
  • Funding home improvements  
  • Helping children with house deposits 
  • Upgrading your car
  • Covering unexpected bills 

While there may be a very important reason to access your pension early, it is always worth considering alternative options. In any case, the more you have invested in your pension pot, the better off you will be in retirement.

A regulated financial adviser can help you to explore the best option for you, while considering your immediate and future needs.

What are the tax implications? 

A major factor to investigate is how much tax you’ll pay when cashing in your defined contribution pension early. This can significantly reduce the amount you end up with.  

Under current pension freedom rules:  

  • You can take 25% of your DC pension tax-free  
  • Remaining withdrawals are taxed at your marginal income tax rate
  • Large withdrawals could push you into a higher tax bracket   

So, while the initial 25% avoids tax, the other 75% of your pension cash-in is subject to income tax of up to 45%. A high tax bill could easily catch you by surprise*. 

*Please note that tax rates differ if you live in Scotland. All our opinions regarding taxation and related matters are based on our understanding of the current tax law and practice of HMRC, which is subject to change.

Have I got expert retirement planning advice? 

Since pension cash-in is irreversible, getting professional advice helps ensure it factors in your overall financial position and retirement plan. An experienced regulated adviser considers things you may overlook, like: 

  • Projecting realistic income needs in later life 
  • Tax planning opportunities
  • Managing sequence of returns risk 
  • Leaving any residual pension wealth    

They will objectively assess if cashing in your pension now aligns with your goals or simply creates longer-term issues. And they guide you through the process smoothly if cashing in does make sense. 

Retirement finances involve complex moving parts. Unless you’re very financially savvy, advice tailored to your situation often pays for itself when making big pension decisions. 

Do I understand all the risks involved?  

While pensions offer tax relief on contributions, they also provide risk management features you lose when cashing in. So, as well as income and tax risks, weigh up: 

  • Losing future investment growth – pension savings benefit from compounded returns over decades. Cashing in early sacrifices this. 
  • Investment volatility – if withdrawn savings are exposed to market fluctuations with poor asset allocation, they could be depleted rapidly, leaving insufficient retirement funds.  
  • Misusing lump sums – money taken tax-free might get wasted on depreciating assets or overly extravagant indulgences without proper planning. 
  • Financial abuse – large lump sum withdrawals increase vulnerability to scams or coercion. Additional safeguards help prevent this.  
  • Beneficiary provision – an untouched pension can pass on tax-efficiently to nominated beneficiaries upon death if unspent. Cashing in your pension could reduce an intended inheritance.    

Make sure you’ve carefully weighed up all the wider implications – both short and long-term – before settling on cashing in your pension early. 

In summary – ask the right questions first  

Taking the leap to cash in your defined contribution pension early is not always black and white.

While pension freedoms provide greater access, they also require greater responsibility for ensuring retirement security lasts your lifetime. So, reflect deeply and answer the above questions to determine if accessing your pension serves your best interests now and in the decades ahead.   

And if in any doubt – seek regulated professional financial advice for guidance based on your specific circumstances. 

At the end of the day, it’s your hard-earned pension money. Make sure whichever route you take – leave intact, partially or withdraw fully – the decision aligns with your personal financial objectives while avoiding preventable pitfalls. 

Still unsure if cashing in your pension early is right for you? Simply request a free pension information pack using our online contact form. Get the facts and clarity you need to determine if cashing in suits your retirement plans.

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