Can I cash in my pension?

When you reach the age of 55 (57 from 2028), you can take cash from your pension savings. The first 25% is tax-free, but if you take out more, you'll have to pay income tax on it. You may pay less tax if you spread out your cash withdrawals and keep below higher rate bands.

How do I cash in my pension?

When you reach the age of 55 (57 from 2028) you have several options to access your money:

1. Take a lump sum out of your savings

The first 25% of your cash withdrawal is tax-free. If you want to take more cash, you have to pay income tax on it, as you didn’t pay income tax when you put money into your pension plan. If you take all of your pension savings in one go, you might end up in a higher tax band, therefore paying more income tax.

2. Convert to a regular income

If you decide to receive a regular retirement income from your pension pot (annuity), you can ‘sell’ your pension pot to an insurance or pension company. They’ll then calculate how much income you’ll receive every year until you die. Although this might sound a strange arrangement, the advantage is that you’ll receive a stable income. The annuity company carry the risk of paying out more than what was in your pension pot, but all of this will of course come at a cost.

3. Take regular smaller cash amounts

If you want to be in control of your pension savings, you can decide to withdraw smaller amounts on demand instead of giving all your savings to an annuity company who decides how much you’ll get. Some benefits of taking this approach include:

  • Withdraw as much as you need, as often as you like
  • If you plan ahead, you can avoid going over the higher tax band, avoiding a higher tax rate on your cash withdrawal
  • When you die, the remaining pension pot can be passed over to anyone you choose. They don’t have to pay inheritance tax

4. Don’t cash in your pension and leave it for now

Most modern pension plans, such as the PensionBee plans are invested in a mix of shares, property, bonds and cash. If you’re 55 and still employed, it might be an option to leave your money where it is. The longer your money is invested, the more likely it is that your pension pot will grow. If you’ve chosen the PensionBee Tailored Plan, your money will gradually be moved to safer assets, such as bonds and cash, as you get older. BlackRock, the money manager of the plan, considers bonds and cash as more stable and this might be more appropriate when you’re closer to your retirement age.

Things to look out for when cashing in your pension

1. Bear in mind you’ll have to pay tax. You didn’t pay tax on your pension contributions, so the government will charge income tax on the ‘income’ you take out. The first 25% will be free, anything above will be taxed. When you consider other income such as the State Pension, your pension cash withdrawal might be taxed in a higher tax band.

2. Taking cash from your pension pot affects how much you can take out later. The longer you can keep your money invested, the more chance it will have to grow.

3. Take financial advice if you’re unsure about the options available for cashing in your pension, but make sure you’re clear on what a financial adviser might charge you. There’s also the option to access the Government’s free impartial Pension Wise service if you wish.

Manage your money with PensionBee

With PensionBee you can manage your retirement saving online in one place, and use our pension calculator to set a retirement goal. You can set up regular contributions and make one-off payments quickly and easily from your online account. Plus existing customers can download our app in the iTunes and Google Play stores, and use it to access their real time pension balance with PensionBee.

Join PensionBee now and take control of your pension saving.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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