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|
|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.|
Find out more…
How can I avoid a large tax bill? -
If you are thinking of totally withdrawing your pension fund, you might want to take into account any other earnings that you will have in the tax year, as the pension fund will be added to your earned income for tax purposes.
Everyone has a personal tax allowance of earnings before they pay tax, which might provide a way to draw pension funds in stages over a number of years. However, any tax planning should be discussed with a financial adviser or tax expert beforehand.
Use a tax calculator to understand more.
How else can I take my pension? -
You could consider securing a guaranteed retirement income. With this option, you give your pension savings to an insurance company and in return, they pay you a guaranteed income every year for the rest of your life. Learn more about pension annuities.
Alternatively, you could opt for a flexible income approach such as drawdown. With this choice, your pension savings are invested and you take an income from those. Find out more about income drawdown.
Tax relief on future pension savings -
Once you have taken the cash, the amount of defined contribution pension savings on which you can get tax relief each year is reduced*. If you want to carry on building up your pension pot this option may not be suitable. To find out more, see "Money Purchase Annual Allowance" and "Annual Allowance" within our Jargon Buster.
*Apart from pension pots of £10,000 or less where you are taking the benefits as a small pot lump sum. You can take up to 3 pension pots as a small pot lump sum under the Government’s small pots rules, without it affecting any other defined pension benefits.
What happens when I die? -
Any cash that you have withdrawn from your pension pot will count as part of your estate for Inheritance Tax purposes.
Any money left inside your pension is considered to be outside of your estate, and therefore not considered for Inheritance Tax purposes.
Instead, if you die before the age of 75, your beneficiary will receive any remaining funds in your pension pot tax-free. However, if you die aged 75 or over, your beneficiary will pay tax at their marginal rate on the funds they withdraw from your pension pot.