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Cashing in your pension

You can take some or all of the money you've saved in defined contribution pension schemes as a cash lump sum. What’s more, you can take up to 25% completely tax-free in addition to the yearly tax free allowance for income and leave your remaining pension fund invested. Taking 25% of your pension savings as tax free cash could free up money to:

  • Pay off any remaining mortgage
  • Save for emergencies and unforeseen expenses
  • Take that holiday of a lifetime
  • Invest in products that generate a tax free income, like ISA's

How to access your tax free cash

Apart from a few exceptions, most people will need to pay tax on their pension income, as you would with your salary. You can take up to 25% of your pension tax free in one of two ways.

Up to 25% as tax free cash

  • Take up to 25% of your pension pot as a tax free lump sum.
  • The remaining 75% of your pension would then be used to buy a pension product, for example an annuity, and would be liable for any tax when you take it.

25% tax free on every withdrawal

  • Take 25% tax free on every withdrawal as you go.
  • You can leave your pension fund where it is and take out chunks of money as and when you need them. 25% of each withdrawal would be tax free.

Taking more that 25% of your pension as cash

There are a number of advantages and disadvantages of taking extra cash over the 25% tax free amount.

Advantages

  • The money is yours to spend however you like
  • The decision to allow people to access extra cash could be reversed
  • You could use the money to buy products that pay a tax-free income

Disadvantages

  • The amount you take, over 25%, is added to your income and taxed
  • You will still need an income to live on in retirement
  • Inheritance Tax may be payable on money remaining on your death

Any reference we make to taxation are based on our current understanding of current legislation and HM Revenue & Customs practice, which can change.

Tax-free cash explained

Video transcript

Meet Cathy, she’s 65. While she doesn’t work anymore, her husband John earns enough for both of them to live on comfortably. She’s due to start drawing the state pension and plans to use it as a disposable income to treat herself shopping and spend while out with friends.

Cathy has £32,000 in her personal pension. She doesn’t feel she really needs an income from it at the moment. However she is planning to take all of her 25% tax-free entitlement to plan something special for their 20th wedding anniversary.

She’ll leave the rest of her pension pot invested, hoping that it will grow. Cathy knows if she decides to change her mind she can access her pension savings at any time.

That’s Cathy’s story. If this is something you’d like to explore, talk to an adviser or get your online advice report today.

Things to consider

  • These days you can take all of your pension savings as a cash lump sum. However, the balance above the 25% tax-free cash lump sum will be added to any other income you have and taxed.
  • Taxable pension income includes earnings from employment or self-employment, investments, the state pension and other taxable benefits and income, such as money from a property rental.
  • People with small funds, where the income their fund can generate may make little difference to their standard of living, could be tempted to take their entire pension fund as a cash lump sum.

Have a commitment free chat with a Pension Specialist

Call us on 0800 032 9301

TextDirect: First dial 18001

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