Cashing in a Pension

During uncertain economic times, cashing in a pension might seem tempting. Not least if you’re worried about volatile markets affecting your pension’s performance or if you want to help your children or elderly parents with their finances. But it pays to be well-informed before you cash in a pension, and Hilltop is here with some guidance.

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Cashing in a pension

When can I take my pension?

Since the Pension Freedoms were introduced in 2015, pension savers have more choices than ever before when it comes to cashing in a pension. However, this can be a blessing and a curse in terms of making the right choice for your circumstances and ensuring your pension savings last the full duration of your retirement and beyond. 

Most pension savers can access the funds within their defined contribution pension from the age of 55 (rising to 57 from 2028). The first port of call for many people looking to cash in a pension will be the 25% tax-free portion of their pension pot, which can either be taken in one go or as part of a series of smaller lump sums.

Even when you can legally access your pension cash, that doesn’t necessarily mean you should. Where possible, if you can delay cashing in a pension, you could give your funds extra time to grow. This could make all the difference to your long-term financial prospects. Hilltop’s advisers are here to help you make the right decision.   

How to cash in a pension:

There are several ways to cash in a pension, which can be used in combination to give you more flexibility: 

Lump Sums

You can cash in a pension using lump sums in a variety of ways. For instance, you could take the 25% tax-free portion of your pension as one lump sum or a series of smaller lump sums that each have a 25% tax-free portion.

The remaining taxable share of your pension pot can also be taken in one lump sum. However, while this can be a viable option for smaller pension pots, taking money out of larger pots in this way can lead to a large tax bill.

Pension Annuity

Having dipped into the tax-free part of your pension, there are two main ways to take the remainder of your funds as an income. The first is by purchasing a pension annuity, which gives you a regular, guaranteed income – typically for the rest of your life.

This can be an attractive option if you tend to be more risk-averse. However, once you’re tied in you can’t change your mind. Plus, unless you purchase a joint-life annuity, you can’t pass on an annuity when you die.

Pension Drawdown

The other main option for taking an income is pension drawdown. If your pension provider offers this option, you’re able to take an ad-hoc income as and when you want to take out funds.Drawdown gives you the flexibility to withdraw as much or as little as you want each year while keeping the remainder invested. However, any income you take will be taxable at the relevant tax band and your investments can fall in value as well as grow.

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Why would you want to cash in a pension?

Pensions are an incredibly tax-efficient savings vehicle. Many of us would only ever dream of cashing in a pension as a last resort, especially in one go, for fear of running out of money later in life. However, life is unpredictable and in certain circumstances – after consulting a financial adviser – partially cashing in a pension can make sense. 

Circumstances when you might want to access your pension cash include:

  • Helping grown-up children to buy a house.
  • Funding an elderly parent’s care expenses.
  • Clearing any remaining debts you might have.

Whenever you’re looking to access money from your pension it pays to speak to a financial adviser first. Your pension needs to provide you with an income throughout your retirement. Taking too much money from your pension in the early years of retirement can leave you with a shortfall later in life, which can be hard to recoup.

Cashing in a Pension: Frequently Asked Questions

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Yes, you can. In theory, and depending on whether your provider allows it, you could cash in a pension pot in one go. However, this is rarely a sensible option as it could mean that you run out of money, have nothing to pass on to your dependents, receive a large tax bill, and potentially lose out on some means-tested state benefits.

When it comes to cashing in a pension, whether whole or in part, it pays to seek the advice of a Hilltop adviser first. 

 

In most cases, you can’t withdraw funds from a defined contribution pension until you reach the age of 55. This minimum age threshold for early retirement is set to rise to 57 in 2028. Be wary of companies offering early access to your pension funds; they’re likely to be fraudsters.

It may be possible to cash in pension funds earlier if you’re in ill health or if your policy has a protected retirement age, which is common for athletes and forces veterans.

The timescales for taking money from your pension can vary from provider to provider, and also the type of pension you have. If you have a Defined Benefit pension a lump-sum may not be possible and the rules are governed by the scheme provider.

Under the “small pots” rules, you can cash in up to three personal pensions worth £10,000 or less. The whole value of these smaller pensions must be taken in one go.

However, the good news is that in doing so you won’t trigger the money purchase annual allowance (MPAA), which reduces your yearly pension contribution allowance from £60,000 to £10,000. 

There’s no limit to the number of small occupational pension pots you can cash this way.  

A deferred pension is simply a pension that you choose to delay taking until later in life. That can be a personal pension, workplace pension or even the state pension.

Essentially, you can cash in a deferred pension in exactly the same ways as usual. However, the big benefit of taking an income from your pension slightly later is that it has the chance to grow in value. You can even continue paying into a personal or workplace pension until the age of 75. 

This doesn’t include state pension, where you cannot receive a lump sum from the government.

The short answer is: yes. This can make sense in some cases, such as if you’re cashing in a smaller pension worth £10,000 or less under the “small pots” rules. However, it makes less sense to do so with a larger pension pot because any funds over and above the 25% tax-free threshold will be taxable as income.

This could push you into a higher tax bracket and lead to a hefty tax bill. Not to mention the fact that you could ultimately run out of money sooner than you’d planned. Again, we recommend seeking pension advice from one of Hilltop’s experienced financial advisers before you make any decisions.

Yes, provided you’ve reached pension age and have a defined contribution scheme with an old employer that you no longer pay into (known as a “frozen” or “preserved” pension), you can cash it in using the usual methods.

If you have a defined benefit or final salary pension with a previous employer, you typically won’t be able to access your funds until you reach the pre-agreed “Normal Pension Age” (NPA). This is typically 65 or, if you’re lucky, 60.

 

With a defined contribution pension fund, the transfer value signifies the amount that would be transferred to another pension scheme should you opt for a pension transfer.

A transfer value quote is not guaranteed (it’s typically subject to investment performance) and can differ from the fund value, especially if exit charges apply.

With a defined benefit pension, a cash equivalent transfer value (CETV) gives an estimate of the amount your provider would offer you to transfer your funds to a defined contribution scheme. 

A CETV usually has a timed guarantee of three months from the date of issue. However, the FCA stance is that transferring a Defined Benefit pension to a Defined Contribution pension is rarely an advisable option due to the benefits you would stand to lose in the process.

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