How cashing in your pension works
Once you’re 55 (or 57 from 2028), you can take money from your pension any time.
You can take your whole pension in one go if you want to. This is sometimes called 'full encashment'. But you’ll normally pay more tax by doing this, especially if you’re still working.
Another option is to use pension drawdown to take smaller lump sums or set up a regular income.
Taking your pension in one go can mean paying more tax
25% of your pension is normally tax free – but the rest is taxed as income. If you take your whole pension in one go, you may end up paying a lot more tax than if you spread it across your retirement.
Here's an example, if you take £100,000 from your pension across 3 tax years instead of 1, you could pay £10,000 less tax.
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Tax rules and legislation may change in the future. Tax treatment depends on your individual circumstances including where you live in the UK.
Cashing in pension pros and cons
Pros
- You’re in control
Once you’ve taken money from your pension, it’s yours. You have freedom to use it however you want. - Cashing in pots under £10,000
You can normally cash in ‘small pots’ worth less than £10,000 without triggering the Money Purchase Annual Allowance.
Cons
- You could pay more tax
Taking your pension in one go is normally less tax efficient. - You could run out of money
If you use your money early in retirement, you’ll have less to spend later on. - Inflation could reduce your spending power
Cash normally loses value over time due to inflation. - Less flexibility
Cashing in a pension over £10,000 will trigger the Money Purchase Annual Allowance. This means future pension contributions will be capped at £10,000 a year.
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Cashing out versus staying invested
Taking your pension in one go means you know how much you've got. But you could pay more tax. Your money could lose value over time due to inflation, so it's worth considering if you'll need to rely on it later in life.
Keeping money in your pension gives it the potential to grow. But your pension can go down or up in value and could be worth less than was paid in.
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David's retirement story: Relying on other income
Other retirement options
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Annuity
Find out how you could use your pension money to buy a regular, guaranteed income that lasts for the rest of your life.
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Pension drawdown
Use your pension flexibly, setting up a regular income or taking lump sums when you need them.
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Fix and flex
You can mix retirement options to balance security and flexibility.
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Explore retirement options
Compare different ways to use your pension savings.
FAQs
Read our FAQs to get down into the detail of cashing in your pension and how it works.
