Can I take my entire pension pot in one go?
- How you can take your entire pension pot in one go when you retire
- What are the tax implication of doing this?
- What this option could mean for you and your future retirement income
This page will tell you how you can take all your pension fund in one go and how much you'll pay out in tax if you decide to do so.
How can I take my entire pension in one go?
As a major part of the April 2015 pension rules changes it's now possible to take your entire pension fund in one go as cash for you to spend as you wish. However, there are considerable tax implications in going for this option.
To do this you can close you pension pot and take your fund as cash. The first 25% will be tax-free and the rest will be taxed at your highest tax rate (by adding it to the rest of your income).
There may be charges for cashing in your whole fund and not all pension schemes or providers will offer this option. Similarly, some pension companies will require that you take financial advice before cashing in, which means you’ll need to pay the adviser a fee.
For more on this: Tax and pensions.
What does it mean for me?
The main thing you need to look at if you’re thinking about taking your pension in one go is your tax situation. If your pension pot and other sources of income combined are in excess of £150,000, you will pay tax at the highest rate of 45%.
You’ll probably pay tax at source on your pension (via pay-as-you-earn or PAYE) and then pay too much via an emergency tax code, meaning you’ll then have to claim the money back.
Paying tax on your pension fund
How much tax will you pay on a pension lump sum withdrawal?
Since April 2015, you have been able to cash in all, or some, of your pension pot if you are 55 or older, even if you're not ready to start a pension yet. The first 25% of the withdrawal is tax-free; the rest is taxed as extra income.Calculate your tax
Developed in association with Jonquil Lowe, JTL Financial Research
How much do you want to take?
What's the lump sum you want to withdraw? This can be all or part of your pot.
If you expect to have other income during this tax year - for example from private pensions, rental income or the state pension - include that here. Don't include income from savings and investments.
What you get, and what tax you pay
If you cash in xxx, you will pay xxx in tax.
This means you'll receive xxx after tax, which includes a tax-free lump sum of xxx.
Whether you take your whole pot or just part of it, 25% of the withdrawal is tax free. The rest is taxed as income. Making a series of smaller withdrawals over several years can mean less tax than if you take your whole pot at once.
Find out more about options for pension income, under the 2016 rules.
Spreading withdrawals over a number of years can minimise your tax bill and mean that your tax-free entitlement is spread over several years.
Which? has created a calculator to show you how much tax you'd pay if you took your whole pot, or a chunk of it, as a lump sum.
There's more about tax on pensions in our guide to tax in retirement, which also covers allowances and the state pension.
Find how much tax you’ll pay with our calculator.
Taking your entire pension is worth considering if…
- You need to get your hands on the money quickly
- You’ve suffered from poor health and a guaranteed income for life might not be the best option
- You want to re-invest your money or have quick access to it
- You have several different pension pots and want to cash in one or two to give you more retirement income at the outset
Taking your entire pension might not be the best option if…
- You’re likely to spend your retirement savings in a short period of time
- You want to avoid a hefty tax bill
- You want a regular income for you, your spouse or any other dependents after you die
- You’re not prepared to get financial advice first
Colin Smith, 66, from Bristol
Colin has taken a ‘mix and match’ approach to his pension - he has several pots. Since 2000, he’s received a BT final salary pension, which is linked to the Consumer Prices Index and so keeps pace with inflation.
When Colin decided to fully retire in May 2015, he then took his smaller House of Commons pension of around £20,000 as a lump sum. He contacted HMRC at that time to talk about the tax implications of taking all of his fund in one go.
With a lump sum I can pay off some debts and invest the rest as a contingency fund.
In the past he would have had to arrange an annuity or income drawdown, or pay 55% tax if the sum were above £2,000 pre-March 2014, or above £10,000 in the run-up to the changes in April 2015.
Which? expert view
Withdrawing all of your pension fund in one go is obviously a risky strategy, particularly if, unlike Colin, you have no alternative private pension provision.
Cashing in your pension pot might seem more attractive than buying an annuity or income drawdown, but there could be an unwelcome surprise in the form of a large tax bill.
You’ll pay income tax of 40% on anything above £43,000 (45% above £150,000) in the 2016/17 tax year, so taking the pot in smaller chunks over a number of years could minimise your tax bill.
- Pensions and retirement - all you need to know about pensions and retirement income
- Income options under the 2015 pension rules - choices for converting your pension
- The Which? Money Helpline - get expert advice on your annuity
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