With this option, each time you take money from your pension pot, usually 25% will be tax-free and the remainder of that withdrawal will be subject to income tax. This means the amount you take will always be a combination of tax-free and a taxable amount. You can take money out this way as single cash amounts and/or a regular income.
Do you have a smaller pension pot?
There are slightly different rules for what are called “small pots”. You may have a small pot if its value is less than £10,000. It’s possible to take a small pot as a cash lump sum. The first 25% is paid tax-free. On the remaining 75% you will have to pay tax at 20%, and you will have to claim or pay an difference in tax to HMRC. This will apply to all payments made under these rules.
For personal pensions you can use the small pots rules up to three times. You have no limit on the number of times you can take small pots from company pensions. This is subject to the rules on the scheme. If you take cash lump sums under small pots, this will not affect your Money Purchase Annual Allowance or ‘MPAA’.
Scott is 56 and a higher rate tax payer. Scott has £50,000 in one of his pension pots and he would like to cash it in to pay for some urgent repairs to his house. He’s able to do so as he has another pension pot to fund his retirement.
Scott takes 25% tax-free cash as a lump sum; £12,500
The remaining 75% (£37,500) is subject to tax.
Estimated tax payable: £15,000 which leaves £22,500.
Total received by Scott; £12,500 + £22,500 = £35,000
Because he’s taking it all in one go, he has to pay income tax on it. And as a higher rate tax payer and still earning Scott will be taxed at 40% (or 41% if he was a Scottish Rate tax payer). Scott will also need to think about any other income he may receive in that tax year and the impact on the tax he may have to pay in the future.
Working assumptions:
These examples are based on an individuals living in England or Wales with a Personal Allowance of £12,750 for 2022/23. No other income is taken into consideration. When added to other income for the year, the amount of tax to pay could be at a higher rate.
The actual amount you receive and the amount of tax you may need to pay will depend on the option you choose and your individual circumstances.
The growth rates applied in these examples do not include inflation.
If you’re unsure what is the right option for you and your circumstances, we always recommend you speak to a financial adviser.
The above illustrations are not real life examples or recommendations.
Our calculator will help you understand how the options could impact your retirement income. You can use it to understand what your pension pots can provide. It will also show you the buying power of your money by taking into account the effects of inflation.
Please read all of our assumptions to understand how we’ve worked out the amounts.
The results are not a recommendation and not financial advice.
This planner shows you how taking different amounts of money from your pot can impact how long your money might last. You can input different amounts and see the impact it has.
This calculator will provide an estimate of how much Income Tax you may pay, depending on how much money you take from your pension. You can input different amounts in the box that asks for your gross salary and see roughly how much tax you might have to pay.
This tool is to show you how much Emergency Tax you might have to pay on withdrawals from your pension pot.
Yes, you can - but remember to consider how you will fund your retirement and think also about tax you may pay, and if this might push you into a higher tax bracket.
Yes, but cashing in your pension to clear debts, buy a holiday, or indulge in a big-ticket item will reduce the money you will have to fund your retirement. Whichever way you take your money, particularly if it’s your main source of income, you’ll need to plan it out carefully so you don’t run out of money and need to rely on other kinds of income.
If you take your entire pension pot as a lump sum, or take ad-hoc lump sums, the amount of pension savings on which you can get tax relief each year is reduced from £40,000 (the ‘annual allowance’) to a lower amount (called the ‘Money Purchase Annual Allowance’ or ‘MPAA’).
In 2022-23 the MPAA is £4,000.
No, you have the flexibility to take out money how and when you need it. You don’t have to take all of your money at once, and if you take single amounts you can control how much tax you pay by spreading the amount over a number of years.
Yes, but remember interest rates in banks and building societies can be low, and there could be associated charges. Leaving money in your pension pot may be more tax-efficient and has the potential to grow, though as with all investments, your money could go down as well as up, so you might get back less than you put in.
(also known as "Flexible cash and income or Drawdown")