Can I cash in my entire pension in one go?
As a major part of the April 2015 pension rules changes, it became possible to take your entire pension fund in one go as cash for you to spend as you wish.
You can do this from the age of 55.
However, there are considerable tax implications to consider before 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, particular workplace pensions, 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.
Cashing in a pension: FAQ
Got a burning question about cashing in your pension? See if we've answered them in this Q&A
How much tax do I pay if I cash in my pension?
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%.
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.
Emergency tax when cashing in your pension
When you cash in your pension, it's likely that you'll end up paying more tax than you need to.
This is because your pension company won't know what your personal tax code is, or how much income you earn from other sources.
In absence of this information, it applies an 'emergency' tax code to your withdrawal.
You'll be taxed on what's known as a 'Month 1' basis. This assumes that the pension income you earn from cashing in is 1/12th of your annual income.
A withdrawal of £20,000 is assumed to be part of a £240,000 annual income.
This means you could lose some or all of your personal tax-free allowance, and could end up paying the highest rate of tax, 45%, on a good chunk of your pension cash.
The good news is that you can quickly claim this back, by sending one of three forms to HMRC. You should be repaid within four weeks.
- P55 is for those who take out a some but not all of their pension as a lump sum
- P50Z is for those who take out all of their pension and are no longer working
- P53Z is for those who take out all of their pension and are still working
Should I cash in my pension?
Cashing in your pension: 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 reinvest 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.
Cashing in your pension: a bad idea 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.
Cashing in a pension: a case study
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 £45,000 (45% above £150,000) in the 2017/18 tax year, so taking the pot in smaller chunks over a number of years could minimise your tax bill.