Cashing in a pension
In this guide: taking your pension out in one lump sum, what to think about before you decide and how our pension income calculator could help.
If you're aged 55 or older, then yes – you can choose to cash in your entire pension pot and receive a lump sum. While this may seem tempting, it is worth considering all your other options first. Taking your pension as a lump sum won't provide you with a regular income and could have quite significant tax implications. That’s why it’s worth getting professional financial advice and looking at other possibilities, such as annuities, first.
If you're not sure how much your pension is worth, use our pension calculator to find out.
1. Will it affect my tax bill?
The money in your pension pot is tax free, and so is any increase in its value. However, if you take all or part of your pension as a lump sum, usually only the first 25% is tax free, while the remaining 75% is taxed as earnings. So, if you cashed in a pension pot of £250,000, you would pay no tax on the first £62,500, but the remaining £187,500 would be taxed according to your tax code and personal allowances. According to www.gov.uk current income tax rates are:
| Income tax rate |
Taxable income |
% tax |
| Basic rate |
£12,571 to £50,270 |
20% |
| Higher rate |
£50,271 to £150,000 |
40% |
| Additional rate |
over £150,000 |
45% |
In fact, if you have other sources of income and already pay tax on them, taking a cash lump sum from your pension could even push you into a higher tax bracket.
You should also be aware that if your pension pot is worth more than the lifetime pension allowance (currently £1,073,100), you will pay 55% tax on any lump sum you withdraw from your pot.
2. Will cashing in my pension affect my entitlement to benefits?
Taking a large one-off lump sum from your pension will increase your income and any savings you have. This means you might no longer be entitled to the same level of means-tested benefits you currently receive. It could even mean you are no longer entitled to any benefits.
3. Will cashing in my pension affect the amount of money I can leave in my Will?
When you die, any money left in your pension pot doesn't count as part of your estate, so it is not liable for inheritance tax (IHT). In fact, your pension pot may be a good way to leave some money to your friends and family in your Will, but this will depend on your personal arrangements and circumstances.
If you die before you reach the age of 75 your pension pot can pass to the beneficiaries named in your Will free of IHT and other taxes. However, if you live longer than 75, your beneficiaries will have to pay income tax on any cash they withdraw from the money left in your pot.
Of course, if you take the whole of your pension pot as a lump sum, there will be nothing left to leave to your family or friends. Also, if some of that lump sum is still in your bank account when you die, it will count as part of your estate for IHT purposes.
It may be more tax efficient to look at one or more of the other ways to take your pension rather than cashing it all in at once.
| Generate a guaranteed income |
Generate a flexible income |
Leave it alone (for now) |
Mix & match |
| Use your pension pot to buy an annuity that gives you a regular income for life. |
Keep your pension pot invested and draw income from it as and when you need it. |
Hold off taking any money from your pension pot until you need it. |
Withdraw up to 25% of your pension pot and invest the remainder in an annuity or allowable investment fund. |
When you use our chosen partner Age Partnership’s Pension Income Service, they will compare pension providers to find the right pension income options for you – be that an annuity, pension drawdown or a combination of the two.
If you haven’t yet accessed your pension, and depending on a number of factors such as your location, age, health conditions and type of annuity chosen, you could benefit from a higher income in retirement.
They can look at what's available right across the market, and guide or advise you on your options. How much help you receive is entirely up to you.
The Age Partnership team is so confident of finding you the best pension income deals that they will give you £100 if you find a better like-for-like quote.
Use our pension calculator to get a no obligation tailored quote.
Calculate your pension income now
