Taking your tax-free cash: everything you need to know

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Taking your tax-free lump sum from your pension savings is a stage a lot of people look forward to. But how does it work? And how can you take it? We answer all this and more.

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How much do I get as a tax-free lump sum?

Most people will get 25% of their total pension pot tax-free. This can change depending on the type of pension plan you have and if you’ve gone over your lifetime allowance, but, generally, most people get 25%. You’ll pay income tax on the remaining 75%.

When can I get my tax-free lump sum?

You can access your pension savings, including your tax-free lump sum, at the age of 55 (rising to 57 in 2028). In some cases, you can access them earlier — if you’re in ill health or in a particular scheme with a protected age, for example — but these cases are rare and it’s more likely you’ll need to wait.

It’s also important to be aware of any company or scheme that promises you’ll be able to take your pension savings before you reach 55. These are very likely to be a scam and you could lose your money. Find out how to avoid pension scams in our article. 

Do I need to take it all at once?

It can depend on the type of pension product you have and what it allows. But in most cases, you can take it bit by bit if you’d prefer. You might even find it more beneficial to do it this way. There are a couple of reasons for this.

First, the longer you leave your pension savings invested, the more opportunity they have to grow. So taking all of your tax-free lump sum at once could mean you get less in your pocket over the long term than you would if you took it in smaller chunks. 

The second reason is that taking your tax-free lump sum in chunks over time is a tax-efficient way of taking your pension savings. Remember, you’ll pay income tax on the rest of your savings. So using your tax-free lump sum as a way to supplement the taxable part of your income could mean that you pay less tax overall.

Some people also choose to use their tax-free lump sum as way of reducing their working hours and starting a phased retirement. If you cut back on your hours, you could use some of your tax-free lump sum to top up your reduced salary.

The value of investments can go down as well as up and you may get back less than was paid in. If the overall value of your pension pot falls, the value of your tax-free lump sum will fall too.

Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment.

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Some important things to think about

Do you need to take it now?

Your pension savings need to last you throughout your retirement – which could be longer than you might think. Taking too much at once, or taking them too early, could mean that you’re more likely to run out of money later. Plus, as we mentioned earlier, leaving your pension savings invested as long as you can gives them more opportunity to grow. So it can make sense for some people to put off accessing their savings for as long as possible.

You might lose State benefits

If you’re entitled to receive State benefits like Universal Credit or Pension Credit, you could lose your entitlement or be able to claim back less if you start accessing your pension savings. This is because your pension savings will count as a form of income or could be treated as ‘capital’. So do check you won’t be impacted by this.

This can change depending on whether you’re over or under Pension Credit age. You can find out more on this from Citizens Advice.

Be aware of the amount you can pay in

Taking a tax-free lump sum won’t affect the amount you can pay in to your pension plan. Before you access any taxable income from your pension plan, the total amount you can pay in each tax year and still get tax benefits is £40,000, or your total salary, whichever is lower. You’d need to pay a tax charge for anything over this amount.

However, once you do start taking taxable income, for most people this will reduce to £4,000 a year. This is an important consideration when you’re working out plans for taking your retirement savings. Particularly if your plan is to keep working and paying in after you start to take your money.

How do I get my tax-free lump sum?

Depending on your provider, you should be able to do this online, over the phone or by filling out a form. 

If you’re a Standard Life customer, you can do it online or by giving us a call. You can find out more about our online services on our website, or visit our support page for FAQs and ways to get in touch. 

Taking your pension money is a big decision and it’s important to think about getting financial advice before you do this. If you don’t have a financial adviser, you can find a list of advisers on Unbiased - an independent site where you can find an adviser in your local area. There’s likely to be a cost of any advice you receive. 

If you’re aged 50 or over, you could also use Pension Wise, a service from MoneyHelper. They offer free and impartial guidance when it comes to your pension.

The information here is based on our understanding in September 2022 and shouldn't be taken as financial advice.

Tax rules and legislation may change and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.