Take cash from your pension plan

What you need to know about tax

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.
 

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 subject to tax.

Taking money out over 1 year

Keep in mind:  The examples below are based on a pension pot of £100,000, not living in Scotland, and have no other income.

Taking money out over 2 years

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.

Taking money out over 3 years

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.

Other important things to think about

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.

• Do you need the money now?

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.

• Taking too much could push you into the next tax band

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.

• Payments into your pension plan could be restricted

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.

• Taking cash could affect your state benefits

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.