Money Advice Service

Under rules introduced in April 2015, once you reach the age of 55, you can now take the whole of your pension pot as cash in one go if you wish. However if you do this, you could end up with a large tax bill and run out of money in retirement. Get advice before you commit.

How it works

Did you know

Cashing in your pension pot will not give you a secure retirement income. If you’re thinking of doing this, get free guidance from the government’s Pension Wise.

To take your whole pension pot as cash you simply close your pension pot and withdraw it all as cash.

The first 25% (quarter) will be tax-free. The remaining 75% (three quarters) will be added to the rest of your income and taxed in the normal way.

Things to think about

This option won’t provide a regular income for you – or for your spouse or any other dependant after you die.

Three quarters (75%) of the amount you withdraw is taxable 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.

For many or most people it will be more tax efficient to consider one or more of the other options for taking your pension.

Find out more at the end of this guide.

Taking a large cash sum could reduce any entitlement you have to benefits now, or as you grow older – for example to help with long-term care needs.

Cashing in your pension to clear debts, buy a holiday, or indulge in a big-ticket item will reduce the money you will have to live on in retirement, and you could end up with a large tax bill.

If you need to clear debts get specialist help – see Where to get free debt advice.

You might not be able to use this option if you have received a share of an ex-spouse or ex-civil partner’s pension as a result of a divorce, or if you have certain protected rights with your pension. Check with your scheme or provider.

Tax you will pay

Remember, three quarters (75%) of the amount you withdraw counts as taxable income.

Depending on how much your pension pot is, when it’s added to your other income it might increase your tax rate.

Your pension scheme or provider will pay the cash through a payslip and take off tax in advance – called PAYE (Pay As You Earn).

This means you might pay too much Income Tax and have to claim the money back – or you might owe more tax if you have other sources of income.

Extra tax charges or restrictions might apply if your pension savings exceed the lifetime allowance (currently £1,030,000), or if you have reached age 75 and have less lifetime allowance available than the value of the pension pot you want to cash in.

Tax relief on future pension savings

If the value of your pension pot is £10,000 or more, once you start to take income, the amount of defined contribution pension savings on which you can get tax relief each year is reduced from £40,000 (the ‘annual allowance’) to a lower amount (called the ‘Money Purchase Annual Allowance’ or ‘MPAA’).

The MPAA for 2018-19 is £4,000.

If you want to carry on building up your pension pot this option might not be suitable.

Find out more about the annual allowance and money purchase annual allowance in our guide Tax relief on pension contributions.

What happens when you die?

Any remaining cash or investments from the money that came from your pension pot will count as part of your estate for Inheritance Tax (IHT) purposes.

Whereas any part of your pot not used would not normally be liable for IHT and if you die before age 75 will pass tax-free to your beneficiaries, provided the money is paid within two years of the provider becoming aware of your death.

Your other retirement income options

Taking your whole pot as cash could land you with a large tax bill – for most people it will be more tax efficient to use one of the other options. Get guidance or regulated financial advice before you commit.

Cashing in your pension pot is just one of several options you have for using your pension pot to provide a retirement income.

Because of the risk of running out of money, we recommend you think very carefully before using this method to fund your retirement income.

For an overview of all of your options and where to get help and advice see our guide Options for using your pension pot.

This article is provided by the Money Advice Service.