Take the cash and run?

If you’re reading this, then chances are you probably know that you can use your pension savings to provide an income by taking out an annuity or a flexi-access drawdown plan - or now entirely as cash. With each option you can take up to 25% tax-free, but here are some of the things to think about if you’re considering cashing in the rest of your pot.

Taking cash from your pension

There are two ways of taking your whole pension savings as cash. You can withdraw all of the money in one go. Or you can take a series of smaller amounts over a longer period of time, while the rest stays invested. This may give your pot the chance to grow but the value could also go down and so you may not get back what you put in.

You can do what you like with the money you take out, but can you budget for this to last?

If you’ll be relying solely on your pension savings in retirement, you’ll need to ensure that the cash can last the rest of your life, or you may run out. This would also mean you would have nothing to pass on to loved ones when you die. 

So what about tax then?

You’ll get up to 25% tax-free - either if you take the money as one lump sum or if you take smaller lump sums over a period of time. The rest is taxed alongside your income for the year. This could push you into a higher tax band, especially if you take a large amount, so it’s a good idea to take a look at which choice suits your financial circumstances and needs in retirement.

If you choose to take your money as cash, then your provider will also have to take Pay As You Earn (PAYE) tax on any payments made to you. This is usually done using an Emergency Tax Code. Because of this, you could end up overpaying or underpaying tax. If you think you have overpaid or under paid tax you can contact HMRC to set things right. 

If you only want to take 25% tax free cash from your pension, you could buy an annuity or flexi-access drawdown with the remaining money. You can read more about these other options for taking your pension within the related content below.

Considerations if you’re thinking of cashing in your pension

  • You can do what you like with the money you take out, but can you budget for this to last throughout your retirement? 
  • Think about how you’ll provide for your loved ones in your retirement and after you die. 
  • How will you safeguard the value of your money over time against the effects of inflation? 
  • You could consider combining several pension pots to take all or some as cash. 
  • Withdrawing money from your pension could affect any guarantees your pension may have. 
  • It may also impact your rate of tax, pension allowances, or any other means-tested benefit you may be entitled to. 
  • Be aware that if you have any outstanding debts that you may be required to pay your creditors using the money you withdraw. 
  • By taking your pension as cash, you may be restricting the amount you can invest tax-free into a pension in the future.

Retirement brings the opportunity to spend your time doing the things you love. Whatever you decide to do with your pension make sure you’re fully aware of your options, including all tax implications, so that you can keep your plans on track. 

We are not recommending a particular retirement option, or course of action, over another.

In addition to the support we offer, we recommend that, from age 50, you seek impartial guidance from Pension Wise, the free service from the government that is available on the internet, over the phone or face to face.

If you are a member of an occupational pension scheme, the options available to you may vary, so please contact your scheme provider. If you have a pension with guaranteed benefits of £30,000 or more, you need to take financial advice before taking your pot as cash or transferring to a flexible income option. In addition, if you want to transfer out of a defined benefit scheme you are also required to take financial advice.

Tax rules require careful consideration and may not reflect your individual circumstances so your actual liability may be higher or lower. The above is based on our understanding, as at July 2015, of current taxation, legislation and HM Revenue & Customs practice, all of which is liable to change without notice. For more information please visit www.gov.uk.

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