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Income option – take my entire pension fund at retirement

Find out about the issues involved in taking your whole pension fund in one go and the need for advice before choosing this option.

In this article
Can I cash in my entire pension? Should I withdraw my entire pension?
Where should I get advice about pensions? Cashing in a pension: a case study

Can I cash in my entire pension?

The first 25% of your pension can be withdrawn completely tax-free.

You’ve always been able to withdraw the remainder of your savings, but this was previously taxed at 55%.

The new reforms mean that you will be pay tax at your marginal rate – 0%, 20%, 40% or 45%. This will vary depending on how much money you withdraw.

In Scotland, income tax bands have changed - you'll either pay 0%, 19%, 20%, 21%, 41% or 46%. You can find out more in our guide to income taxes in Scotland

In the 2020/21 tax year, if you withdraw less than £12,500 from your pension, you won’t pay any tax, providing that you have no other income from any other sources. 

If you withdraw £150,000, you will pay tax at the highest rate of 45%.

You can take your money in a series of lump sums from uncrystallised pensions (funds not yet used to pay a scheme pension, buy an annuity or go into drawdown) – these are called uncrystallised funds pension lump sums (UFPLS).

What does this actually mean for the tax I might pay?

Say you’ve got £500,000 in a pension in 2020/21:

  • The first £125,000 can be withdrawn tax-free.
  • The next £37,500 is taxed at 20%. You’d pay £7,500 in tax.
  • The next £112,500 is taxed at 40%. You’d pay £45,000 in tax.
  • The remaining £225,000 is taxed at 45%. You’d pay £100,800 in tax.
  • In total, you’d pay £153,300 in tax, leaving you with a total lump sum of £346,700.

This calculation applies to people in England, Wales, and Northern Ireland. Income tax in Scotland is applied differently. 

It does not take into account any other taxable income that you might have (eg state pension, other pension income).

Find out more: Tax on pensions – our table shows the tax due on a range of pension-pot withdrawals


Should I withdraw my entire pension?

The obvious consequence of taking all your pot in one go is that you might then run out of money if you spend it too soon. 

By offering greater flexibility, the government is making the assumption that the vast majority of people will act prudently and not end up relying on the state.

There are also tax implications in taking the fund in one go. 

You’ll be taxed at your marginal rate, as detailed above, and opting for something like income drawdown or a flexible annuity, where you gradually take the money, might be a more tax-efficient way of accessing your fund.

Where should I get advice about pensions?

If you are considering this option, getting independent financial advice is a must. Once you’ve taken all the money from your pension, you’ll lose the immediate opportunity for investment growth.

What you do with your pension fund will also depend on your other sources of income and assets, and a full and comprehensive financial review is required to help you make this decision.

The consumer guidance session, known as Pension Wise, considers all your options, including taking your entire pension pot upfront and the potential consequences. 

The guidance session is being delivered by one of a range of independent organisations, including The Pensions Advisory Service (TPAS) and Citizens Advice. 

The Money Advice Service (MAS) offers support via a retirement adviser directory for consumers who would like to find a regulated financial adviser

Anyone with a DC pension who is approaching retirement and would like the chance to access Pension Wise can book an appointment on 0800 138 3944.

Cashing in a pension: a case study

Gaynor Kingston, Tewkesbury

Gaynor decided to cash in her share (around £30,000) of the joint pension plan she’d set up with her brother as working directors of their company.

The main reason was to fund improvements and reduce the mortgage on a recently purchased property. Gaynor said: ‘Having the opportunity to take the money from the pension scheme proved particularly timely.’

She also wanted to eliminate the scheme’s administration charges, which had risen rapidly to nearly 5% of the fund’s value and were no longer covered by investment returns.

The firm administering the pension made lots of mistakes, especially struggling to divide the pot between brother and sister.

Which? expert view

Many people have taken advantage of the freedom to cash in their pension, but they have mostly converted pots worth less than £30,000.

The main thing to think about is avoiding a hefty tax bill; cashing in a pension over around £50,000 will mean you pay income tax of 40% or more. If you have a guaranteed source of retirement income, perhaps in the form of a final salary pension, cashing in a small pension might be a sensible strategy.