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Can I cash in my whole private pension pot?

Updated 07 May 2020

Nick Green
Financial Journalist

Take whole pension as a lump sum

As 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 your pension pots from age 55, and that you can take out as much as you like – even the whole pot at once.

But a better question than ‘Can I?’ is ‘Should I?’ 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. Here you can find out your options for taking pension lump sums, and the pros and cons involved.

What is pension freedom?

In April 2015 the government introduced something it called 'pension freedom' (also known as 'the pension freedoms'). It gave pension savers unprecendented control over how they can access their pension pots. Previously, most people had little option but to use their pension pot to buy an annuity, which sometimes didn't suit their lifestyle. Pension freedom retained the annuity option but opened up more ways in which people could take a pension - including taking the whole pot as a lump sum.

When can I cash in my pension?

If you have a defined contribution pension (most pensions are this type), then the rules allow you to access it flexibly from your 55th birthday onwards. However, most people who take independent advice are advised to wait much longer than this. A pension pot needs to last for the rest of your life, and life expectancy at 55 is between 26 more years (for a man) and 29 more years (for a woman).

Starting to draw your pension also limits the amount you can pay into it. 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.

When you do come to retirement, there are several different ways to draw your pension. You should familiarise yourself with these as much as possible before making any decisions. Seeing an independent financial adviser is also 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. Read on to find out why.

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 the dangers of cashing in my whole pension?

Taking too much from your pension at once could 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?

You can take 25 per cent of any pension pot tax free. However, the remaining 75 per cent will be taxed in the normal way. For example, if you had a pension pot worth £40,000 you could take £10,000 and pay no tax. If you then took out the other £30,000 in a single year (and had no other income), another £12,500 would be tax free (this is your personal allowance). This leaves £17,500 subject to income tax at 20 per cent. Your income tax bill for the year will therefore be £3,500. By taking your pension pot out all at once, you would have lost nearly 9 per cent of it in tax.

What are the other risks of cashing in a pension?

The other main risk of cashing in a whole pension at once is simply that of using up your pension too fast. Put simply: if you want to take the whole sum at once, this suggests that you intend to spend it all (or most of it) in a single year. This may be fine if this pension pot is just one of many that you have. But if it represents most or even all of your retirement savings, spending it all at once will leave you wholly reliant on the state pension. Not only is the state pension generally considered too small to live on by itself, it may be some years before you can receive it (since state pension age is increasing over time).

What if I cash in my pension to invest it?

Perhaps you don’t intend to spend your pension pot all at once. But if that’s the case, why do you want to cash it in? If your intention is to invest it, then you should bear in mind that your pension is already a very hard investment to beat. Growth on your pension is tax free, and you can choose from a range of investment strategies when you move into drawdown. In short, you are unlikely to find an investment with higher returns without taking considerably more risk.

The warning about tax also applies. Any money you take out of your pension (over your personal allowance) will be taxed, so you would start out by making a loss before you could reinvest the money. In most cases, therefore, it is best to take from a pension only as much money as you need at any one time.

Beware of pension scams

Pension fraud has increased now that people have more flexible access to pension pots. Never make any major investments unless you have first cleared them with your independent financial adviser. Most importantly, never respond to cold calls or unsolicited emails, and only use an FCA-regulated financial adviser whom you have chosen yourself.

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: buy 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).

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 call ‘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.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.