Can I cash in my whole private pension pot as a lump sum?
Discover everything you need to know about cashing in your whole pension pot in our helpful guide.
When you enter your fifties, you may start to wonder ‘When can I take my pension?’ but also ‘How much of my pension can I take?’
The short answers are: you can access and withdraw your pension pots from the age of 55 (this will rise in the future), and you can take out as much as you like – even the whole pot at once.
But a better question is whether you should access your whole pension at once.
There can be some serious drawbacks to taking too much money from a pension at once, and not only because it will run out sooner.
In this guide, we outline your options for taking pension lump sums (including taking it in one go) as well as the pros and cons of this approach.
If you’re considering cashing in your pension pot, it’s recommended that you seek independent financial advice. You can easily find a financial adviser with Unbiased’s smart matching tool.
You can currently access and withdraw your pension pots from the age of 55, rising to 57 in 2028
When you do eventually retire, there are several different ways to draw your pension
There are several pros and cons to consider before cashing in your pension
A financial adviser can help you understand the best options to take for your circumstances
What is pension freedom?
In April 2015, the government introduced ‘pension freedoms.' It tore up the old rule book and gave pension savers unprecedented control over how they accessed their pensions.
Previously, most savers had little option but to use their pension to buy a guaranteed income with an annuity, which sometimes didn't suit their lifestyle or offer the best value.
Now, you can still buy an annuity if you wish, but there are other options available too, including income drawdown and lump sum withdrawals.
When can I cash in my whole pension pot?
If you have a defined contribution pension, such as a personal pension or self-invested personal pension (SIPP), then the rules allow you to access it flexibly from your 55th birthday onwards (age 57 from 2028).
However, while this gives older savers useful flexibility, taking money out of your pension before you have retired isn’t always recommended.
If you withdraw your pension early, you risk running out of money before you reach state pension age, which is currently 66, but is set to rise to 67 and 68 in the future.
Your pension needs to last for the rest of your life, and, according to the Office for National Statistics’ life expectancy calculator, at age 55, a typical man can expect to live a further 29 years, while a typical woman is likely to live for another 32 years.
An unintended consequence of dipping into your pension before you finish working is that it may also trigger the money purchase annual allowance (MPAA) and limit the amount you can pay into it in the future.
The MPAA is a lower £10,000 limit, which restricts how much you can pay into your pension each year. It’s triggered when you take taxable income from your pension.
So, as long as you are working and able to live off your earnings (and hopefully able to pay into your pension, too), you will usually be advised to leave your pension savings untouched.
The pension freedoms only cover defined contribution pensions. The rules are different if you have a defined benefit pension, such as a final salary or career-average scheme.
You might be able to take all your benefits as a lump sum under 'trivial commutation' rules, if your pension is worth less than £30,000 and the scheme permits it. This option generally applies if you're at least 55 or retiring early due to ill health.
When you do eventually retire, there are several different ways to draw your pension.
You should familiarise yourself with these before making any decisions. Seeing a financial adviser is important, as the choices you make will affect the rest of your life and may be irreversible.
Cashing in your pension – i.e. withdrawing the whole amount at once – is technically possible. However, in most cases, it is best avoided.
We’ll now explore why.
What are the dangers of cashing in my whole pension?
Taking too much from your pension at once could leave you running out of money in retirement.
And it could also leave you with a large tax bill.
It is important to remember that most withdrawals from a pension count as income, and this income is taxed in the same way as a salary.
Find out more about how pension income is taxed.
What are the tax implications of cashing in my pension?
| Tax when you cash in your pension | Tax treatment |
|---|---|
| First 25% | This is tax-free |
| Remaining 75% | Taxed in the same way as other income |
| Example with £40,000 pension withdrawal | £10,000 tax-free £30,000 taxed at your highest rate - assuming you had already used the £12,570 personal allowance, a basic rate taxpayer would pay £6,000, while a higher-rate taxpayer would pay £12,000 |
Also, bear in mind that if you’re currently a basic rate taxpayer, your withdrawal could be enough to bump you into the higher rate tax bracket (depending on the size of your withdrawal and your existing income).
Currently, the higher rate of tax kicks in on income over £50,270 a year.
Find out how much retirement income you might receive (before tax) from your private pension and how to boost it by using our pension calculator.
What are the other risks of cashing in a pension?
Another risk of cashing in a whole pension at once is simply that it will get spent too quickly.
If you have lots of pensions or income from other sources, cashing a small pot might not have too much impact on your future financial security.
However, if it represents most, or even all of your retirement savings, spending it now would leave you wholly reliant on the state pension.
Not only is the state pension generally considered too small to live on by itself, but it may be some years before you can receive it (since state pension age is increasing over time).
What other options are there for my pension?
If you decide against cashing in your pension, there are several other alternatives which could help provide an income throughout retirement.
Here’s a handy table with a summary of your main options.
| Pension options | How does it work? | Who does it suit |
|---|---|---|
| Taking your tax-free lump sum | You can take a 25% tax-free lump sum and leave the rest invested to make a later decision. | Pension savers who want to take some cash but preserve most of their pension to live on in retirement. |
| Buying an annuity | You exchange your pension for a guaranteed income for life. | Someone who wants a guaranteed income for life. |
| Income drawdown | Your pension remains invested, and you can withdraw flexible income as needed. | Someone who wants flexibility and is willing to take some investing risk. You will also potentially have wealth left to pass on, depending how much you withdraw. |
| Combining options | A combination of income drawdown and annuities. | Someone who wants to cover their basic expenses, with some additional flexibility on top. |
What if I cash in my pension to invest it?
Some people take money out of their pensions just because they can.
It’s possible to invest your cash in a stocks and shares ISA, instead of a pension.
However, you’ll have to make the investment decisions yourself and it might be tempting to spend your cash more quickly.
The warning about tax also applies. Any money you take out of your pension (over your personal allowance and beyond your 25% tax-free cash) will be taxed, so you would already be making a loss before you could reinvest the money.
This is why it is usually more tax-effective to only take money out of your pension when you need it.
Beware of pension scams
If you’re cashing in a pension, it also pays to be aware of fraud. A downside of the pension freedoms and flexible access to our pots is that the risk of pension fraud has increased.
This means you should never make any major investments unless you have first discussed them with a financial adviser.
Most importantly, never respond to cold calls or unsolicited emails, and only use a financial adviser regulated by the Financial Conduct Authority (FCA) whom you have chosen yourself.
How long does it take to receive a pension lump sum?
Usually it will take around four to five weeks from the date of your request for your pension provider to release your lump sum.
What are my other options for using my pension pot in retirement?
It’s best to use your pension pot to provide a steady income for you over the long term.
There are two main ways to do this: by buying an annuity or setting up a drawdown scheme.
Find out more about ways to take your pension.
Can I cash in my pension before I’m 55?
If you have to retire early due to poor health, you may be able to access your workplace or personal pension before the age of 55 if necessary.
Your pension scheme will define the circumstances in which you would qualify for an ‘ill health pension’, i.e. one you can take early.
If you have a terminal illness and are predicted to live less than a year, you may be able to take all of your pension as a tax-free lump sum (provided you are under 75 and have an available lump sum and death benefit allowance).
If you are not in ill health to the extent of being unable to work, then you cannot legally access your pension before the age of 55.
There are fraudulent schemes that will offer you this option (sometimes called ‘pension unlocking’ or similar), but these are never in your best interests and involved breaking the law.
It may also mean losing most or all of your pension pot. Never talk to anyone who offers you this kind of scheme.
If you found this article useful, you might also find our article on the average pension pot in the UK informative, too.
Get expert pension advice
Cashing in your entire pension pot might seem like an attractive option, but it's crucial to weigh the potential risks and tax implications.
While pension freedoms provide enormous flexibility, it also comes with responsibilities.
Consider the long-term impact on your retirement finances and explore all available options, such as annuities or drawdown schemes, to ensure a steady income.
Remember, your pension is designed to support you throughout your retirement, so make choices that align with your long-term financial wellbeing.
Unbiased can quickly match you with a financial adviser for expert financial advice to ensure you make informed decisions about accessing and managing your pension pot.
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