Taking your entire pension pot as cash

The 2015 pension freedoms allow you to take all of your pension savings in one go as cash. Whilst the first 25% is tax-free the other 75% will be taxed as 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 – so you need to be certain that it’s right for you. For many or most people it will be more tax efficient to consider one or more of the other options.

If you plan to use the cash to clear debts, buy a holiday, or indulge in a big-ticket item you need to think carefully before committing to this option – doing so will reduce the money you will have to live on in retirement, and you could end up with a large tax bill.

To see how taking your entire pot as cash could affect your tax situation, use a tax calculator.

Taking your entire pension pot as cash
Advantages Disadvantages
You have complete flexibility to use the money whenever you like. Once you’ve spent it, it’s gone. You need to consider whether you need it to last you for the rest of your life or if you have other income you can rely on.
25% of your lump sum is tax-free. The remaining 75% of your lump sum is added to your other income for the tax year and taxed as earned income. Depending on how much other income you have, taking all your pension pot as a lump sum might push you into a higher income tax bracket.
  Taking your pension pot as a lump sum could affect your entitlement to means-tested State Benefits. You might get lower benefits as a result.
  If you want to continue to contribute to a pension and your contributions (including those of your employer and the tax relief you receive) exceed £4,000, you may incur an additional tax charge.

 

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