Taking all your pension in one go

If you are thinking about taking some or all of your pension in one go then this guide is for you. It looks at the criteria you need to meet and the two big things you should consider before making any decisions.

The headline facts

If you are 55-years-old or over and have the right type of pension then you can take from it as much or as little money as you like, including the whole lot in one go – if that is what you choose to do. As you probably know, you can take the first 25% of your pension pot tax free. After that anything you withdraw counts towards your annual income and so could be subject to tax; the bill could be quite hefty, depending on how much money you take.

Tax treatment depends on your individual circumstances and may be subject to change.

And releasing pension money early isn’t right for everyone as it will leave you worse off in retirement. Before we go into any more detail on either of these areas let’s double check that you have the right type of pension.

What is the right type of pension?

You can take money direct from all private pensions and some workplace schemes. If you have what is known as a final salary pension things become a little more complicated.  You need to transfer this type of scheme to a private pension before you can withdraw any money. And by doing so you could be giving up some very generous benefits, including a guaranteed income for life from a specific age. A financial adviser can help you to understand if it’s in your best interests to give up any such benefits and to transfer your pension. 

Unfortunately, you cannot take any money from your pension if you have what is known as an unfunded scheme. This mainly affects public sector employees including the NHS, teachers, the armed forces and the emergency services.

Now that we have established whether you have the right type of pension, we need to look at the possible impact of taking some or all of your money from your pension in one go.

How much money do you want to give to the taxman?

You can take the first 25% of your pension tax free, anything after that counts towards your annual income. So, the more money you take from your pension in a tax year the more likely it is that you will receive a considerable bill from the taxman.

For example: let’s say John earns £25,000 per year and decides to take all of his £50,000 pension pot in one go to clear his mortgage. Even taking into account that the first 25% of his pot is tax free, he would end up with a tax bill of £9,986. That’s almost 20% of his pension immediately gone. If you are set on taking all of your pension money and can spread the withdrawals over two or more tax years then the chances are you will reduce the amount of tax you have to pay, in some cases by a lot. 

Can you afford to take some or all of your pension in one go?

For many people the freedom to take money from their pension as and when they want gives them the financial flexibility they need. Although, it is important to bear in mind the traditional purpose of a pension: to provide a regular income in retirement. If you take all of your pension savings now, what will you have to live on in the future? 

You might have other sources of income when you retire which means you will be able to live the life you want, even if you take all of your pension savings now. On the other hand, if you have no other money coming in then could you afford to survive on just the State Pension when you retire?

Even if you think you could and you still want to take all of the money out of your pension, it makes sense to do so as tax efficiently as possible. That’s why you should talk with a regulated financial adviser before making any decisions – one who will clearly and simply tell you what they think is best for you, and with no obligation.

Can I take money from my pension if I am under 55-years-old?

You generally have to be aged 55 or over to take any money from your pension. In exceptional circumstances, such as extremely poor health, you might be able to take money from your pension before this age, although it’s very rare.

What happens if I have already taken my tax-free cash?

If you have already taken the 25% tax-free amount from your pension then in most cases the remainder of your fund will be invested. The chances are you can take this in one or more big chunks whenever you like. Remember that each pound will count towards your annual income tax allowance.