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Can I take my entire pension pot in one go?

Everything you need to know about cashing in your pension, from how defined contribution pensions work to how much tax you'll pay when you cash in your pension.

In this article
Can I cash in my entire pension in one go? Cashing in a pension: FAQ How much tax do I pay if I cash in my pension? Emergency tax when cashing in your pension
Should I cash in my pension? Cashing in a pension: a case study

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

Technically it’s possible, but it comes with a huge tax penalty. You’ll be hit with a 55% tax charge for cashing in your pension before the age of 55.

Be very wary of companies offering you the chance to take money out of your pension early. They often talk about a loophole that allows you to ‘unlock your pension’.

These firms charge fees as high as 30%, and invest the rest of your pension in high risk schemes, which are sometimes scams. You should steer clear of anyone contacting you offering to unlock your pension.

There are some people that can access their pension before the age of 55, but this is usually restricted to professions that have lower retirement ages, such as athletes.

People in poor health may also be able to also be able to access their money earlier.

People with a private defined benefit, or final salary, pension can cash in their savings. This also applies to some people who have a public sector final salary pension.

It involves transferring your pension savings into a defined contribution pension, after which you can withdraw all of your money using the pension freedoms.

People who have more than £30,000 in their final salary pension must get professional financial advice before they transfer.

This process is fraught with risk of losing valuable benefits and a guaranteed income for life. We’ve explained the pros and cons in our guide to final salary pension transfers.

Note that public sector workers in ‘unfunded schemes’ – that is where no contributions are made in advance – are banned from transferring out of their deal.

This includes NHS staff, teachers, armed forces, civil servants, the police and firefighters.

Under the pension freedom rules, you can cash in pensions of any size as you wish – provided you have a defined contribution pension.

However, there are rules in place that allow you to cash in small final salary or defined benefit pensions; or certain types of defined contribution pensions that pay an income in-house – meaning you haven’t had to buy an annuity.

These are known as ‘trivial commutation’ rules.

Under these rules, you can cash in one of these pensions if the total value of all of your pension benefits is less than £30,000.

Alternatively, you could cash in up to three pension pots of £10,000 or less.

That depends on your age. If you leave your job and you’re over the age of 55, you have the right to cash in your savings.

But if you decide to cash in your pension when you’re under this age, you’ll face a 55% tax charge.

You do have the option of transferring your old workplace pension to a new scheme – either to your new employer if it accepts transfers, or to a personal private pension of your own.

Whether or not you can do this will depend on your scheme.

As you get closer to retirement, it might make sense consolidate your pensions into one scheme, as this could save you charges and make it easier to manage. However, you could potentially be giving up valuable benefits, so it’s worth checking what you’re entitled to.

Find out more in our guide to consolidating your pension.

Your mortgage is going to be the biggest debt you carry, so you may naturally want to get rid of it once you have access to a large lump sum.

It will depend on your circumstances, but you need to consider:

  • How long you have left on your mortgage
  • Whether you’ll face any early repayment charges by paying it off early
  • Whether you’ll have enough left from cashing in your pension after paying tax
  • The impact that cashing in a pension will have on your future retirement income

If you had sufficient savings elsewhere in other pension schemes which you felt confident would be enough to have a comfortable retirement, paying off your mortgage could be a good idea, freeing you up from your monthly repayments.

However, if cashing in your pension now will leave you with little left for retirement, think carefully. The state pension alone is not sufficient for a comfortable retirement, and private savings are necessary to ensure you can afford the essentials.

And if you were planning to invest the savings you have made from ending your mortgage repayments to build up your pension again, proceed with caution.

Once you have cashed in a pension, the amount you can save into a pension and earn tax relief falls dramatically – from £40,000 a year to just £4,000. This is known as the Money Purchase Annual Allowance.

We’ve explained this in depth in our guide to the pensions annual allowance.

Any savings you leave behind that are in a defined contribution pension can be inherited by anyone you nominate. They can take it as an income, or as a lump sum, and pay tax at their own personal ‘marginal rate’.

The good news is that your pension does not form part of your estate for inheritance tax purposes, so won’t be ‘double-taxed’ when you die.

However, when you cash in your retirement savings, they’re no longer held in a pension and count towards your inheritance tax allowance. This means your heirs could end up paying tax of up to 40% on any part of it they inherit

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.