Want to take some cash from your pension?
You can normally start taking cash from your pension once you reach 55 (may be subject to change). You can dip in as often as you like, and can change to a guaranteed income or flexible income at any time.
Watch our quick video guide to taking cash
It pays to think about tax
A quarter of your pension pot is usually tax-free, and you'll pay income tax on the rest. The amount of income tax you pay depends on your total income, your personal circumstances and where you live in the UK. It can pay to be tax savvy. In the examples below you can see how a tax bill can be smaller by taking your money over several years.
The figures in the examples below use the tax rates for 2020/21 that apply to the rest of the UK and not Scotland. They also don't take into account that the pension pot may grow. They also assume your pension is your only income.
How much is tax-free?
If your pension pot was worth £100,000 then £25,000 would be tax-free and £75,000 would be taxable.
Taking money out over 1 year
If you decided to take your money out in the one tax year, a large amount of your pot would be taxed at the higher rate. So you'd get £82,500 in your hand, which includes the £25,000 tax-free. This means you'll pay a tax bill of £17,500. But you could reduce this if you spread out taking your pension money over more than one tax year.
Taking money out over 2 years
If you take your tax free cash in year 1 and then your taxable income out over two tax years, even less falls into the higher rate. You'd get £90,000 in your hand and pay a tax bill of only £10,000.
Taking money out over 3 years
If you take your taxable income out over three tax years, even less falls into the higher rate. You'd get £92,500 in your hand and pay a tax bill of only £7,500.
Other things to think about
Do you need the money now?
It’s a good idea to only take cash from your pension if you need it. The more you take now, the less you’ll have in future. Once you go over your tax-free cash limit you’ll pay income tax on the rest.
Watch your withdrawal doesn't push you into the next tax band
You could end up paying more if your withdrawal added to any other income in that year takes you into a higher rate tax band. You may pay less tax if you spread out your cash withdrawals over several years and keep below higher rate bands.
Payments into your pension could be restricted
Taking out more than your tax-free cash limit (when you start accessing taxable income) restricts the payments you or an employer can make to any of your pensions, to £4,000 a year. This can be a problem if you’re still earning and either have other savings you want to pay into a pension or if you want to make significant payments into any of your pensions.
Any means-tested state benefits you receive may be affected if you take cash or income from your pension - check this isn’t going to be a problem before going ahead.
Not sure if taking cash is right for you?
Here's how it compares with other ways you can take your money
*Usually you can’t pass on your guaranteed income for life, but you could add on options – for example, to pay a spouse's pension after you die, to keep paying the income for a guaranteed period, or to include value protection which provides a lump sum death benefit.
If you're unsure about which option is right for you our retirement path finder can help. It asks you a few questions and can give you a snap shot of your options.
You can also use our retirement calculator to explore your options based on your pension value. This will give you the chance to compare different options and see how much tax you might pay.