Should I cash in my pension?

The minimum age that you can access your pension is going up from 55 to 57 from 2028. But just because you can cash in your pot in your 50s, it doesn’t mean that you should.

You should check first whether you would be hit with a big tax bill or give up valuable benefits. You also need to ensure that you won’t run out of money in retirement by withdrawing too much from your pension too soon.

In this article, we cover:

• How much tax will I pay if I cash in my pension?
• How to pay less tax when cashing in my pension
• Can I take my pension at 55 and work?
• Should I ask a financial adviser to help me decide?
• What are the alternatives to cashing in my pension?

Learn more in our simple guide to pensions.

When can I cash in my pension?

Since the pension freedoms were introduced in 2015 it became possible to take your entire pension fund in one go as cash once you reach the age of 55. The minimum age is rising to 57 in 2028.

This applies to defined contribution schemes and not final salary or defined benefit schemes. We explain the difference in our guide on pensions.

Bear in mind that the earlier you cash in your pension, the more likely it is that you could run out of money later in retirement.

What are the pros and cons of cashing in a pension?

Cashing in your pension is something you should consider carefully.

If you have a large pension pot or complicated financial affairs then you might want to speak to a financial adviser* to help you understand whether it’s a good idea.

But briefly, here are some of the main pros and cons of cashing in your pension that you might want to think about:

Pros:

• Cashing in some or all of your pension could let you to reduce your working hours, or even stop work entirely
• Now that you no longer have to buy an annuity, you now have more flexibility, particularly if you use an income drawdown product which lets you take money in chunks when you need it
• When you withdraw money from your pension, the first quarter is free from income tax (the remaining three quarters will be taxed in the same way as income)

Cons:

• The earlier you cash your pension in, the higher the risk of being left short in older age
• Unless you use it to buy an annuity, the money you take out will not provide a guaranteed income for life
• Once you have cashed in the money, it will no longer grow (unless you reinvest it)
• If you are still working or earning money from a different source, such as a buy-to-let property, you could be pushed into a higher-rate tax band. This is because your pension income will be added to other earnings, potentially leaving you with a bigger tax bill
• Withdrawing a large amount could reduce benefit entitlements such as housing benefit and income support now or in the future
• Once you start taking an income from your pension, the money purchase annual allowance kicks in, which limits the amount you can contribute into your pot to £4,000 a year (for most people the annual pension allowance is £40,000)

Should I cash in my pension?

This isn’t a simple question to answer as it depends on lots of factors.

Some of these include your:

• Age: if you retire early, you could run out of money later in life
• Financial circumstances: will your pension income cover all your living costs?
• The type of pension scheme you are invested in: if you have a defined benefit pension, you might be giving up valuable benefits by cashing in your pension too soon
• Whether you plan to retire fully or not

How much tax will I pay if I cash in my pension?

Taking money out of your pension pot isn’t the same as taking money out of a savings account. This is because you might have to pay tax on your withdrawals.

• For every chunk that you withdraw from your pension pot, the first 25% is tax-free.
• The remaining 75% is taxed as income and the amount you pay depends on your total income during a tax year.
• Any withdrawal from your pension fund is added to any other earnings you are receiving, so you might be pushed into a higher tax band
• If you are still working or intending to withdraw a large amount of money in one go, bear in mind that you could be taxed heavily.

You are less likely to be pushed into a higher income bracket if you spread out your withdrawals and take smaller cash sums over several years. This means you could pay less tax.

When you cash in your pension, there’s a strong possibility that you will end up paying more tax than you need to at first. This is because your pension company won’t know:

• What your personal tax code is
• Or how much income you earn from other sources

HMRC should repay you at the end of the tax year, though you can also claim a tax refund earlier.

Can I pay less tax when cashing in my pension?

You can usually take the first 25% from your pension as tax-free cash while the rest is taxed in the same way as income.

But if you withdraw money from your pension in small chunks rather than in one go, 25% of each chunk will be tax free. This helps your pension stretch further and will allow you to continually benefit from this tax relief.

Read more about the changes to the lifetime pension allowance and how that might affect you.

Can I take my pension at 55 and still work?

Yes, you can take some or all of the money from your pension pot at the age of 55 and still continue to work if you want to.

This applies to defined contribution schemes, where the value of your pension pot is based on how much money you have paid in and investment growth. Most workplace pension schemes are now defined contribution.

But there are some things to consider because if you choose to carry on working while drawing your pension, there could be hefty tax implications:

• While the first 25% of a pension can be taken as a tax-free lump sum, the rest is viewed as taxable income and is subject to income tax.
• When added to your other income in any given tax year, particularly if you have taken a large amount from your pension in one go, you may be pushed into a higher tax bracket. 
• You will also be losing the tax relief on making pension contributions while still working.
• Once you start withdrawing money from your pension then the money purchase annual allowance kicks in. This restricts the amount of money you can contribute into your pension to £4,000 each tax year.

Check out our guide to pension drawdown.

Find out more: “Equity release sits alongside my part-time job and state pension”

Should I use a financial adviser?

Financial advice regarding your pension and your retirement plans could save you time, money and a lot of future worries. 

If you have a large pension and a complicated financial situation then speaking to an adviser could be very wise.

Among other things a good adviser can give you guidance on the benefits and risks of cashing in your pension. They should also be able to help you make your pension stretch.

If you want more help around this topic that’s tailored to your circumstances, Kellands* is offering all of our readers a free hour-long session* with one of its independent financial advisers. They can get a good idea of your financial goals, and help you take the first step to achieving them.

Read how much does financial advice cost – and is it worth it?

Can I cash in my pension before I am 55?

You can only tap into your pot before the age of 55 in very restricted circumstances, such as:

• You have a serious medical condition such as a terminal illness
• If you’re in a specific occupation such as professional footballer, jockey or trapeze artist (yes, really!)
• Firefighters, the police and members of the armed services may also be able to take pension benefits early 

Contact your provider to see if you are eligible. It is best not to use a pension release company as it may charge high fees; your pension provider will be able to sort it out for you.

For everyone else, a cash withdrawal from a pension before their 55th birthday will be viewed as an unauthorised payment, for which they could incur a 55% tax bill on the amount taken out.

It doesn’t matter if you plead ignorance, have spent the money or offer to put it back.

You might want to read: How to retire early.

Can I cash in my pension if I no longer work for a company?

You can cash in your pension from an old employer from the age of 55, even if you no longer work for them. The money belongs to you.

While you can’t cash in a pension before 55, you can transfer the money to another pension provider. This could be a good idea if you have changed jobs often and have multiple pension pots with different companies.

Transferring your pension plans to one place can:

• Help reduce your costs
• Widen your choice of investments
• Make it easier to manage your money

We have a quiz to help you decide whether it’s worth combining your pensions.

However, some pension schemes simply don’t allow transfers, including those for public sector workers like teachers, police officers, firefighters, NHS staff, civil servants and the armed forces. 

If you are able to transfer, watch out for high exit fees, which could leave you worse off financially then if you had stayed put.

We gave Lisa some tips on consolidating her pensions.

What are my alternatives to cashing in my pension?

You don’t have to cash in your whole pension. There are plenty of other options.

 Alternatives include:

• Taking money from other savings first and continue to contribute to your pension
• Keeping most of the money in your pension and taking a regular income from the pot or just taking chunks as and when you need it
• Using your pension money to buy an annuity, which is a guaranteed income for life
• Choosing a mix of different options

What is the government pension tracing service UK?

If you move jobs a number of times during your career, you may find that you have a string of different pension pots. If you don’t have all the paperwork, or you can’t remember who your pension provider was, contact your old employer.

You can also use the government’s Pension Tracing Service to track down old pension providers by searching their database or calling 0800 731 0193.

Note: The Pension Tracing Service can’t tell you whether you have a pension with a particular provider or how much it is. It can only give you the contact details of that provider.