Should I Cash In My Pension? 

Thinking about cashing in your pension? Whether you’ve got a small pension pot or a large one, it’s obviously a big decision and there are so many things to consider before you take the plunge. Luckily, we’re expert pension advisors and we’re here to help you decide whether cashing in your pension now rather than later is the right course of action for you and your specific circumstances. So settle in because in this article, we’re going to highlight things you need to consider before taking money from your pension. Your pension needs to last you through retirement, so taking money now, could have a huge impact on your future.

Can I Cash In My Pension Early?

Legally, you can only cash in your pension pot early (before the age of 55) in very restricted circumstances, such as:

  • Terminal illness
  • If you have a specific occupation (such as professional footballer)
  • If you’re a firefighter, police officer or member of the armed services 

If these circumstances don’t apply to you then if you make a cash withdrawal from a pension before your 55th birthday it will be viewed as an unauthorised payment. Please be aware of companies saying they can help you to take money out of your pension before aged 55, as this is more likely than not to be a scam, and you could end up losing some or all of your funds.

Once you’ve reached the age of 55, you’re allowed to take your entire pension fund in one go as cash. However, before you do so, it’s worth checking whether you’ll be hit with a huge tax bill, miss out on great benefits, or simply run out of money during your retirement. With that in mind, here are four things you should consider before cashing in your pension:

1. Work out how much tax you’ll pay

The last thing you want is to end up paying more tax than you need to do. The first 25% of your pension pot can be taken from your pension as a tax-free cash lump sum, but then you’ll pay tax at your marginal rate on any further withdrawals. So you could end up in a higher-tax bracket for the financial year if you end up taking several large sums from your pension over a few months. 

2. Will you still want to make pension contributions?

Drawing an income from your pension triggers the money purchase annual allowance (MPAA). This means the amount you can still save tax-efficiently into a pension shrinks to just £4,000 per tax year.

3. Is now the best time to make a withdrawal?

Cashing in your pension might mean you’re taking income from investments that have fallen in value, which could see you using up your pension pot much quicker than you realise. Taking funds from a pension that has dropped in value would mean locking in your losses, and never having the opportunity to recover.

4. Will you have enough to live on later in life?

Cashing in your pension might leave you short later in life. People are living longer these days and you could even need to pay for long-term care down the line. The current full state pension is worth £185.15 a week based on if you paid in 35 years of National Insurance contributions. The state pension starts to be paid at aged 66, but you can defer that to a later age.

Now don’t think we’re trying to dissuade you from taking your pension but they are things you need to keep in mind when making the decision. It’s good to have all the facts at hand! And there are some pros to cashing in your pension pot:

  • The first 25% is tax-free
  • The money might mean you can retire early or work part-time
  • You’ve got some flexibility to do what you want with your money
  • Can start enjoying your savings whilst you’re potentially still fit and healthy

Your age, financial circumstances and the type of pension scheme you’re invested in will also help you make the decision.

Can I Cash In My Pension At 55 And Still Work? 

Yes, you’re allowed to take some or all of the money from your pension pot at the age of 55 and still continue to work. You can do this if you’ve got a defined contribution pension scheme that includes workplace schemes and personal pensions.

If this is what you want to do you’ll just have to be mindful of tax. The three main points to remember are:

  1. If you’ve taken a large amount from your pension in one go, once that’s added to your other income, you might be pushed into a higher tax bracket
  2. You’ll lose tax relief on making pension contributions while you’re still working
  3. Once you’ve taken money, you’ll only be allowed to save £4,000 per annum into a pension. This includes auto-enrolment pensions.

Can I Cash In My Pension To Pay Off My Mortgage? 

If you’re over 55 and have a large outstanding mortgage, then taking cash out of your pension is one way of reducing the debt, but it very much depends on your personal circumstances. 

Paying off your mortgage with your pension could give you peace of mind for the rest of your life knowing that your home is paid up. However, if you’ve got a very low mortgage interest rate, it’s probably better to leave your cash in your pension because of the benefits it provides – especially if your pension fund growth is bigger than the mortgage interest rate. And this will mean you’ll have your pension pot to use in your later years.

There could also be better options available to you for paying off your mortgage, such as downsizing.

How Do I Cash In My Pension? 

If you want to cash in your pension you’ll just need to contact your pension provider and discuss how and when you can take your money. Speaking with a financial advisor isn’t necessary but it may save you from making a costly mistake for your future. An adviser may also be able to help you to reduce your tax payment, save you money and relieve the stress from dealing with pension providers.

What Are The Alternatives To Cashing In My Pension? 

It’s worth remembering that cashing in your pension is not the only option on the table. And if you decide it’s not the right decision for you, there are alternatives you can consider, such as:

  • Taking money from other savings first like an ISA and continue to contribute to your pension
  • Taking a regular income from the pot but keeping the rest invested. This is called Pension Drawdown.
  • Leaving the money invested and taking bits as and when you need it
  • Using your pension money to buy an annuity – giving you guaranteed income for a set period of time, usually your life.

You can also decide to do a mixture of these options.

Hilltop Financial Planning: Pension Advisors 

Before you make any final decision it is certainly worth speaking with professional pension advisors. We would be delighted to talk you through your options and ease any worries you might have about your pension and your retirement planning. Simply give us a call on 0161 413 7051 or arrange a callback and we’ll give you a ring when it’s convenient for you.

Important information: Our website offers information about investing and saving, but not personal advice. If you’re not sure which services are right for you, please request advice from Hilltop’s financial advisers. Remember that investments can go up and down in value, so you could get back less than you put in.

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