Take cash from your pension plan

Want to take cash from your pension plan?

You can usually start taking lump sums from your pension plan once you reach age 55 (rising to 57 from 6 April 2028). 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 remaining 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), or both, at any time. We’ve compared the different options below to help you decide what’s best for you.
 

What you need to know about tax

Normally up to 25% of your pension pot can be taken tax-free with the rest being 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.

Your total income includes money you receive from your pension plan, employment and other taxable sources. It can pay to be tax savvy.

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?

25% of your pension plan is usually tax free. This means if you had a pension plan worth £100,000 then £25,000 would be tax free and £75,00 would be taxable

Important information: The examples below are based on the following:

• You have a pension pot of £100,000
• You have no other income
• You are living in England (income tax rates can vary across the UK)
• You take your full tax-free cash entitlement and use a flexible income option (drawdown) for the rest
• It doesn't account for the performance of any money left invested
• Tax rates can change

Taking money out over 1 year

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.

If you delay taking money you need to remember it remains invested and can still go down in value as well as up. You could get back less than was paid in.

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

For example

If you're still working and take your pension money as well, your cash withdrawal and any other income in that tax year could push you into a higher tax band. Whereas if you wait until your income is lower before accessing your pension money or you spread out your cash withdrawals over several years and keep below higher rate bands, 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.

• Payments into your pension plan could be restricted

Taking out more than your tax free cash will lower the amount you, your employer or any third party (excluding transfer payments) can pay into your defined contribution pension plans each tax year while being eligible tax benefits. It will drop from £60,000 (or 100% of your earnings, whichever is lower) to £10,000.

• Taking cash could affect your state benefits

If you receive any means tested benefits these could be affected when you start to access your pension pot. It's important to check if it applies to you.

• Pension savings are normally outside of your estate

Pension savings are normally not subject to inheritance tax or form part of any debt collection.

From April 2027, the government have announced their intention to include unused pension savings when calculating the value of estates and could be subject to inheritance tax. The full details of how this will work are still to be confirmed.

 

Not sure if taking cash is the right option for you?

Don't worry you have other choices. Our guide to retirement options explains how each of them works, breaks down their features, and has details on how to get started with your chosen option.

Ways to take your pension money

Here’s a quick comparison of how the features of each retirement option compare.

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*Usually you can't pass on your guaranteed income for life (Annuity), 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. Please visit our Guaranteed Income for Life page for more information.