Can I cash in my whole private pension pot as a lump sum?

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.

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.

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. 

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 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% of any pension pot tax free. However, the remaining 75% will be taxed accordingly.

Let’s take a pension worth £40,000. If you took out all the money at once, the first £10,000 would be paid tax-free.

If you had already used your personal allowance, which lets you enjoy £12,570 income a year tax-free, you would then need to pay tax at your highest tax rate on the remaining £30,000.

This would be 20% for a basic rate taxpayer and land you with a £6,000 tax bill. A higher-rate taxpayer, meanwhile, would pay 40% tax and need to stump up £12,000 in tax.

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 if I cash in my pension to invest it?

Some people take money out of their pensions just because they can.

However, if it’s still your intention to invest the money, you should bear in mind that your pension is 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 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 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.

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.