Tax treatment depends on your circumstances and is subject to change
Cashing in your pension
The complete guide
Since the Pension Freedoms legislation was introduced in April 2015, those aged 55 and over now have greater choice over how they can access their defined contribution pension savings.
One option is commonly called cashing in your pension. This means you can take some or all of your retirement savings as a cash lump sum, as long as you have an eligible scheme.
Taking pension money early is not right for everyone as it will leave you worse off in retirement. That’s why it makes sense to get help from a regulated specialist.
This comprehensive guide explains everything you need to know about cashing in your pension in the UK. We'll cover:
Read on for a detailed overview of pension cash-in so you can decide if it is suitable for you.
1. Who can cash in their pension?
The pension freedoms legislation applies to defined contribution (DC) pension schemes. This includes:
Personal Pensions
Stakeholder pensions
Self-Invested Personal Pensions (SIPPs)
Group personal pensions (GPPs)
Most modern workplace pensions
Essentially, if your pension pot has a cash value that depends on contributions and investment growth, it is likely you can access savings as cash from age 55.
The following types of pensions do not offer a cash-in option from age 55:
Final salary or defined benefit workplace pensions
- you would need to transfer to a DC scheme first to cash in
Certain public sector pensions
like the NHS, teachers, civil service, police, armed forces, and fire service
The State Pension
this remains protected until your retirement age
So in summary, if you have a personal pension or a defined contribution workplace pension, you can cash it in from age 55, provided your scheme offers flexible access. You can check with your provider to confirm.
So in summary, if you have a personal pension or a defined contribution workplace pension, you can cash it in from age 55, provided your scheme offers flexible access. You can check with your provider to confirm.
So in summary, if you have a personal pension or a defined contribution workplace pension, you can cash it in from age 55, provided your scheme offers flexible access. You can check with your provider to confirm.
Some key points on eligiblity:
The minimum pension access age is currently 55, rising to 57 in 2028
If you have a protected lower pension age (e.g. 50), you may be able to access your DC pension earlier
Overseas residents can also cash in a UK DC pension, as long as the scheme allows this
Tax implications may differ if you are a non-UK resident when cashing in your pension
You cannot cash in a DC pension on behalf of someone else, even if you hold a power of attorney for them
So in summary, UK residents aged 55 or over with a personal or defined contribution workplace pension can withdraw cash, provided their scheme offers flexible access.
So in summary, UK residents aged 55 or over with a personal or defined contribution workplace pension can withdraw cash, provided their scheme offers flexible access.
2. How does cashing in your pension work?
Cashing in essentially means withdrawing your pension savings as a cash lump sum, rather than using the money to provide an income. There are a few ways you can do this:
Full cash withdrawal - you can close your pension and withdraw the entire pot as cash in a single transaction. The first 25% is tax-free, the remainder is taxed at your income tax rate.
Partial withdrawals - you can opt to take chunks of your pension in stages as and when needed. Again, 25% of each chunk is tax-free.
Tax-free cash sum - if you have not already claimed your 25% tax-free lump sum, you can withdraw just this amount and keep the rest of your pension invested.
Combination approach - you might take just tax-free cash now, then later make partial withdrawals, or vice versa. The choice is yours.
Regular income - Some pension providers let you withdraw a regular monthly or quarterly cash sum, similar to an income. Tax rules still apply.
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.
Your provider will explain their specific process. Typically though, you inform them how much you want to withdraw. They will verify your identity and then arrange for your pension investments to be sold, deducting any tax before depositing the funds into your nominated UK bank account.
Most reputable providers aim to process cash-in requests within 4-8 weeks. But in some cases, it can take longer, such as if investments need to be sold. Always clarify timeframes with your provider.
Most reputable providers aim to process cash-in requests within 4-8 weeks. But in some cases it can take longer, such as if investments need to be sold. Always clarify timeframes with your provider.
3. Tax implications of cashing in your pension
One major consideration when cashing in your pension is the tax you may need to pay. It's important to fully understand the tax rules and implications:
The first 25% you withdraw from your pension is tax free.
The remaining 75% of your withdrawal is taxed as income, at your marginal income tax rate. The rates for 2023/24 are:
Basic rate: 20%
(£12,571 to £50,270)
Higher rate: 40%
(£50,271 to £125,140)
Additional rate: 45%
over (£125,140)
Withdrawing large portions of your pension could push you into a higher tax band for the year. This means paying more tax on the cash sum taken.
If you withdraw your whole pension in one go, you are highly likely to receive a substantial tax bill, even if you are normally a basic rate taxpayer.
However, you can withdraw smaller sums from your pension incrementally over several tax years. This can help spread out and minimise your total tax liability.
Pension withdrawals over your tax-free 25% will be added to any other income you have for the year and be subject to income tax.
Your pension provider will deduct basic rate tax before paying your lump sum. But you may owe more if you are pushed into additional rate tax.
If you plan to take just your 25% tax-free cash sum, this does not count as taxable income, so it won't impact your overall tax position.
Seek professional tax advice if you are unsure about the implications, especially if withdrawing larger sums.
In summary, while the first 25% of any pension withdrawal is tax-free, withdrawing large amounts could result in a substantial tax bill. Getting tax planning advice is crucial to avoid an unexpected charge.
While the first 25% of any pension withdrawal is tax-free, withdrawing large amounts could result in a substantial tax bill. Getting tax planning advice is crucial to avoid an unexpected charge.
4. The pros and cons of cashing in your pension
As with any major financial decision, there are both potential advantages and risks to cashing in your pension. Weighing these up will help determine if it's the right move for you.
Here are the key potential benefits of cashing in your pension:
Access up to 25% of your pension tax-free from age 55 - this can provide a useful lump sum if you have an immediate need for cash.
Pay off existing debts like your mortgage, loans or credit cards. This can reduce ongoing interest payments.
Fund a major purchase or life goal such as home improvements or a car upgrade.
Support loved ones by gifting money for expenses like university costs, weddings, house deposits for children or grandchildren.
More flexibility in how and when you access your retirement savings compared to buying an annuity.
Potentially reduce inheritance tax liability if you withdraw money to gift it to beneficiaries or spend during your lifetime.
However, there are also significant risks:
Cashing in your pension early reduces the amount available to provide an income in retirement. This could negatively impact your standard of living later in life.
Withdrawing large sums at once can leave you with a substantial, sometimes unexpected, tax bill. This will reduce the net amount you end up with.
Pension savings benefit from decades of tax relief on contributions. Cashing in means missing out on future investment growth.
Your pension is intended to provide an income throughout your later years. Once withdrawn as cash, the money could be spent too quickly or incorrectly invested.
If transferring from a defined benefit pension, you would lose valuable, guaranteed retirement income. Make sure you understand the benefits you would be giving up.
Pension providers will require extensive anti-fraud checks which can delay payouts. You may need the cash in a hurry for something like a house purchase deposit.
Pension scammers also target people looking to cash in their pensions. Make sure to only use FCA-regulated advisers and providers.
Overall, while flexibility and access to tax-free cash is tempting, cashing in your pension also carries responsibility. It is critical to take impartial, professional advice to review your specific situation before deciding if cashing in is the right option for you.
Overall, while flexibility and access to tax-free cash is tempting, cashing in your pension also carries responsibility. It is critical to take impartial, professional advice to review your specific situation before deciding if cashing in is the right option for you.
5. Your pension options at age 55
Cashing in your pension is one of many ways you can access your retirement savings from age 55. Under the Pension Freedoms legislation, your main options are:
This leaves the remaining balance still invested to provide yourself with a future income.
Purchase an annuity – you can use your pension to buy an insurance policy paying a guaranteed income for life. Payments are taxed as income.
Flexi-access drawdown - keep your pension invested and take lump sums or a regular income as needed. After your 25% tax-free lump sum, all withdrawals are taxable.
Do nothing - if you don't need the money yet, you can leave your pension untouched to continue growing tax-free.
Combination or phased approach - you can mix and match options over time such as taking just tax-free cash initially and accessing the rest later.
There are a variety of factors that help to determine the best approach for you, such as: your age, health outlook, income needs, desire to leave inheritance, and overall financial position.
For instance, buying an annuity gives you a secure income for life but reduces flexibility. Cashing in your pension provides flexibility to access savings as needed, but it requires careful management to ensure it lasts throughout your later years.
It's wise to take time to research and compare your choices. Consulting a regulated financial adviser can help to identify the most suitable options for your individual needs and priorities.
6. Cashing in your pension safely
While pension cash-in can be appealing, it is absolutely vital to avoid scams and ensure your savings are safe. Follow these tips when accessing your retirement funds:
Take time to thoroughly research your options - never rush into cashing in your pension or be pressured into quick decisions.
Ask your provider to clearly explain their processes, timeframes, and tax deductions. Check you understand before proceeding.
Independently verify the tax you may need to pay. Consider taking professional tax planning advice.
Question unsolicited cold calls: offers that sound too good to be true, guaranteed high returns, and lucrative investment opportunities - these are red flags for potential fraud.
Check the Financial Conduct Authority register to ensure any adviser or firm you use is regulated and authorised. Dealing with unauthorised providers can put your savings at risk.
If you have concerns or feel unsure about taking money from your pension, do not go ahead until you are certain that it is the right decision for you. Seek a second professional opinion if needed.
Shop around between different providers to compare deals.
Take your time to thoroughly read and understand any paperwork before signing documents to cash in your pension.
Keep records of correspondence , forms you complete, and contact details of any advisers involved, in case of future disputes.
Consider appointing a professional trustee or third-party attorney to provide checks and balances on significant withdrawals.
These tips will help protect your hard-earned pension savings and avoid you falling victim to criminals looking to steal your retirement funds.
7. Common pension cash-in questions
If you are weighing up cashing in your pension, you probably still have some important questions around how the process works and the implications. Here, we answer some of the most frequently asked queries:
No, under current UK law the minimum pension access age is 55, rising to 57 in 2028. Beware of firms claiming they can facilitate early access as this is usually a scam. The only exceptions are:
If you have a protected early retirement age, or
Your health is very poor
No, you don’t have to withdraw your entire pension. You can choose to cash in just part of your fund while leaving the rest untouched for now, which may help spread the tax liability. Many people start by taking their 25% tax-free lump sum.
Cashing in part or all of your pension before you need it risks not having enough savings left to maintain your desired standard of living later in retirement. If you fully withdraw your pension and your circumstances change, you may end up having to rely solely on the State Pension, or you may have to work for longer. It is crucial to consider this risk before cashing in large portions of your pension savings.
No, you cannot directly cash in a defined benefit pension. To access this type of pension flexibly, you would first need to transfer to a defined contribution scheme. This transfer is not advisable for most people, as you would lose extremely valuable guaranteed retirement benefits by moving to a DC scheme. Always take regulated financial advice before transferring out of a DB pension.
This varies between providers. Some may only take a few weeks to process payments and transfers out of your pension. Others can take up to 2-3 months or longer to complete, particularly if investments need to be sold. Always clarify expected timeframes with your provider before going ahead. Understand that accessing your pension is rarely instant.
You can take 25% of your pension tax free. Any withdrawals above this are added to your income for the year and taxed at your marginal income tax rate. The rate depends on the income tax band you fall into, based on the total amount withdrawn from your pension plus any other income you have. Seek tax advice to understand your liability.
If your annual income, including salary and any pension income, is below £100,000 per year, then your annual income tax personal allowance will not be affected. However, once you start earning £100,000 or more, your personal allowance steadily decreases until you reach £125,140, at which point, you no longer receive tax relief on any of your earnings. So, if you withdraw a large pension lump sum and this takes your total annual income over £100,000, your income tax annual allowance will be affected for that year.
In summary
While cashing in your defined contribution pension can offer greater flexibility to access savings, it is not the best option for everyone. Tax implications, investment risks, and adequate provision for later life all need careful consideration before withdrawing funds early.
For some, cashing in may provide funds to achieve important goals or meet pressing short-term needs. But pension savings are intended to support you financially in retirement, so cashing in could jeopardise your future standard of living.
Seeking impartial guidance is essential to fully understand your choices around pension flexibility. An expert financial adviser can assess your individual situation and advise if cashing in is suitable and how to withdraw your money tax efficiently.
With proper care, advice, and precautions, cashing in your pension can offer an avenue to use your savings more flexibly. Ensuring you avoid scams and unnecessary tax bills is crucial to making the most of pension freedoms.
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.
Pension legacy: securing your family's financial future
Unlocking retirement: The pros and cons of pension options at 55
Early pension withdrawal: navigating the pros, cons and key considerations
Pension Access is a trading name of Harbour Rock Capital Limited which is registered in England & Wales as a Limited Company, No. 10290349. Authorised and regulated by the Financial Conduct Authority, No. 754580. Registered Offices: Affinity House, Beaufort Court, Sir Thomas Longley Road, Rochester, Kent, ME2 4FD. Telephone: 0800 009 3388. Email: pensionaccess@harbourrockcapital.co.uk
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Taking pension money early isn’t right for everyone because it could leave you with a lot less to live on in retirement. That’s why it makes sense to talk with a regulated financial adviser first.
There is no obligation at all and if you choose to get a check of your pensions then we also include a pre-paid envelope and a consent form so we can access details of your pensions.
Your FREE information guide contains all the information you need to make an informed decision on whether or not taking tax free cash from your pension is right for you.
We're on hand in case you have any questions, and we aim to make the process of withdrawing cash from your pension as simple as possible.
We are regulated by the Financial Conduct Authority so you can rest assured that any advice we give will be based on your best interests.
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