Can I Cash In My Pension?
You must be over 55
A great benefit of pension schemes is that you can usually start taking money from them from the age of 55. This is well before you can receive your State Pension. Whether you have a defined benefit or defined contribution pension scheme, you can normally start taking money from the age of 55.
There are many different ways you can access the money from your pension pot. You can leave your pot untouched, take cash in chunks or get a regular income.
6 options for a defined benefit pension (not a final salary pension)
Leave your pot untouched
You don't need to take your pension money at your 'selected retirement age' - the age you agreed with your provider to retire. You can leave your pension invested and access it in your own time when you're ready.
Get a guaranteed income (annuity)
You can use your pension money to buy an insurance policy which gives you a guaranteed income for life or a fixed number of years. You can take up to 25% of your pot tax free before you buy an annuity.
Get an adjustable income
This option allows you to decide how much pension money to take and how long you want it to last. You can take some of your money as cash - up to 25% is tax free. The rest is invested to give you a taxable income.
Take cash in installments
This option allows you to decide how much pension money to take and when to take it. Your pot stays invested and you take small chunks over time until it runs out - 25% of each amount you take out is tax free.
Take your whole pot in one hit
You can take your whole pension pot as cash - 25% is tax free and the other 75% is taxed along with any other income you have, eg from work, savings or investments.
If you have more than one pot, you can combine options. You could use some of your pension to get an adjustable income and some to buy an annuity. Maybe leaving one pot untouched and taking cash in chunks from another.
Can you take money out of a pension?
If you are looking at a secure retirement income then cashing in all of your pension may not be a great move. To take your whole pension pot as cash you simply close your pension pot and withdraw it all as cash. The first 25% will be tax-free.
How much can you take out of your pension?You could close your pension pot and take the whole amount as cash in one go if you wish. Normally, the first 25% will be tax-free and the rest will be taxed at your highest tax rate - by adding it to the rest of your income. There are many risks associated with cashing in your whole pot.
What if you want to put more money into your pension fund?
When you pay into a pension, you're usually eligible for tax relief on what you pay in based on your earnings and up to a maximum amount each year. This maximum amount is known as your annual allowance. If you take more than 25% of your pension, your annual allowance will fall to £4,000 if you want to pay into a personal pension in the future.
Taking your money as one lump sum will also count towards the total amount of pension money you can use for retirement benefits before paying additional tax charges. The limit for the 2018/2019 tax year is £1,030,000, so this won’t be a problem for most people.
Do you need all the money that's in your fund immediately?
If you don't, you may wish to leave your money where it is, or at least only take the tax free 25%. If you're not intending to stop work yet, it may be a good idea to leave your money where it is, because you might fall into a lower tax band once you retire. This would mean you pay less tax on your withdrawal then, compared to if you took it out now. Any money you don’t take out will remain invested, so the value of that money can still go up and down, and may be worth less than when you invested it.
If you are thinking of withdrawing all of your pension as a cash lump sum. There are a issues you need to consider. Calculate how much tax you'll pay - 25% of what you take will be tax-free, but you may need to pay income tax on the rest.
Instead of taking out all of the money in your pension, you could just take money from your pension as and when you need to.
If you spend all the money from your pension now, you won’t have it when you might really need it in future years.
When it’s gone, it's gone.
If you are approaching retirement it's advisable to get guidance or advice to help you understand your options.
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