The value of your investment can go down as well as up and you may get back less than you paid in. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK also have an impact on tax treatment.
You can usually start taking lump sums from your pension plan once you reach age 55 (subject to change). You decide how much to take and when to take it, you can even take the full value of your pension plan in one go. It's worth remembering that you can run out of money if you take too much, or if you live longer than expected. How long your money lasts also depends on how your investments perform.
There are other ways to take money from your pension plan. You can set up a guaranteed income for life (annuity) or take a flexible income (drawdown) at any time. We’ve compared the different options below to help you decide what’s best for you.
25% of your pension plan is usually tax-free, and the rest is subject to income tax. 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.
Your total income includes money you receive from your pension plan, employment and other taxable sources.
To help you get an idea of how taking cash might impact your tax bill, we’ve put together this handy breakdown.
If your pension pot was worth £100,000 then £25,000 would be tax-free and £75,000 would be subject to tax.
Keep in mind: The examples below are based on a pension pot of £100,000, not living in Scotland, and have no other income.
If you take your tax free cash in year one and then take your taxable income out over two tax years, you may be able to take advantage of your personal allowance each year and you could prevent your income from falling into the higher rate tax band. You could get £90,000 in your hand and pay a tax bill of only £10,000.
If you take your taxable income out over three tax years, you may be able to take advantage of your personal allowance each year and you could prevent your income from falling into the higher rate tax band. You could get £92,500 in your hand and pay a tax bill of only £7,500.
Before you start taking cash, there are a few other key things to think about to help you make the most of your tax allowances and to help make your money last longer.
Delaying taking your money can have some benefits. The value of your plan could go up if the investments perform well. You might also choose to delay taking your money until you’re in a more favourable tax position. For example, if you’re still working you might not want to take your pension money as well as it could push you into a higher tax band. Whereas if you wait until your income is lower before accessing your pension money, you might be in a lower tax band and pay less tax. Keep in mind that the more money you take now, the less you’ll have in future, and anything you take over your tax free cash will be subject to income tax.
You could pay more tax if your cash withdrawal and any other income in that tax year push you into a higher tax band. You may pay less tax if you spread out your cash withdrawals over several years and keep below higher rate bands.
Taking out more than your tax-free cash will lower the payments you or an employer can make to any of your defined contribution pensions. It will drop to £4,000 a year from your usual annual allowance. This can be a problem if you still want to keep paying into your pension plan after you start taking money from it.
Any means-tested state benefits you receive may be affected if you take cash or income from your pension plan. It’s worth checking this isn’t going to be a problem before taking cash.
Here's how it compares with other ways you can take your money:
|
Option |
Will you get a guaranteed income for life? | Does your remaining money stay invested? | Can you access your money at any time? | Can you pass on what's left after you die? |
|---|---|---|---|---|
| Take a flexible income | No | Yes | Yes | Yes |
| Take one or more lump sums | No | Yes | Yes | Yes |
| Buy a guaranteed income for life (annuity) | Yes | No | No | No* |
| Leave your pension invested for now | No | Yes | Yes | Yes |
*Usually you can't pass on your guaranteed income for life, but you could add on options. For example, you could choose 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. For more information please visit our annuity page
Don’t worry; we have some handy tools that can help. They’re quick and easy to use, and can help you make a more informed decision that’s right for you.
Our Retirement Pathfinder tool can help you understand how you can take your pension money in a way that suits you.
Our Retirement Calculator can help you explore your options based on your pension’s value.
If you feel that taking cash from your pension plan is the right option for you, we have a few next steps to help you get started.
Login to take cash from your pension. You’ll also find personalised tools and guides to help you explore your options further.
Login to take cash from your pension. You’ll also find personalised tools and guides to help you explore your options further.
Our team will be happy to help you. Choose the phone number for your type of pension and give us a call or log in to send us a secure message through your account mailbox.
Our team will be happy to help you. Choose the phone number for your type of pension and give us a call or log in to send us a secure message through your account mailbox.
If you’re not sure, we’d encourage you to seek financial advice. There’s usually a cost for this.
If you’re not sure, we’d encourage you to seek financial advice. There’s usually a cost for this.
You can get free support from the government’s Pension Wise service – online or over the phone.
You can get free support from the government’s Pension Wise service – online or over the phone.