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Taking cash from your pension plan

Couple approaching retirement enjoying dinner and wine outdoors

How pension withdrawals work

From age 55 (57 from 6 April 2028), you can start withdrawing money directly from your pension pot. The first 25% is usually tax-free, while the rest is taxed as income. You can take it all at once, or in smaller portions over time – whatever suits your lifestyle and financial goals.

Taking cash from your pension gives you immediate access to your savings

But there’s a chance you could run out of money if you take too much, or live longer than expected. So it’s crucial that you have a carefully considered plan as to how you plan on using the cash.

It’s also worth remembering that there are other ways you can access your pension savings too – such as taking a flexible income (pension drawdown), or buying a guaranteed income for life (pension annuity). You can also combine your options, or even leave your pension untouched to give it more chance to grow. But because your pension’s invested, it’s value can go down as well as up, so you may be left with less than you paid in. 

Tax implications

You can typically take up to 25% of your pension pot tax-free. The remaining 75% is taxed as income, which means it’s subject to your marginal rate of Income Tax.

For example, if you withdraw £100,000:
 

  • £25,000 is tax-free

  • £75,000 is added to your taxable income for the year
     

The taxable amount is lumped together with other income you receive, which may come from sources such as the State Penson, employment salary, personal or workplace pensions, taxable state benefits, or property. Tax-free savings accounts like ISAs don’t count.

This means that, depending on how much cash you take, you may be pushed into a higher tax bracket. So it’s really important to think carefully about the knock-on effect of doing so. The amount of Income Tax you’re subject to depends on where you live in the UK. Tax treatment also depends on your individual circumstances, and is subject to change.

To find out more how much you might be taxed, how much emergency tax you might have to pay and how long your money could last visit our tools and calculators page to help you make informed decisions.

Other important things to think about

  • Do you really need it?
    Delaying taking cash can offer valuable benefits. For example, you could give your pension more chance to grow, or you could find yourself in a more favourable tax position.

  • Means-tested benefits
    Taking cash from your pension may affect your entitlement to claim certain means-tested benefits if you’re pushed into a higher tax bracket, so it’s really important that you explore what this means for you. Find out more by visiting the government’s website.

  •  How remaining money’s invested
    If you choose to leave some of your pension untouched, it’s important to review how your money remains invested. This could affect it’s future value, so it’s important to ensure your investments align with your goals and circumstances.
     

FAQs about taking cash

You can continue contributing to your pension, but once you withdraw any taxable income over the 25% tax-free amount, the Money Purchase Annual Allowance (MPAA) comes into effect. This limits your total contributions to defined contribution pensions to £10,000 per tax year – and exceeding that could result in tax charges.

Any remaining funds in your pension pot can usually be passed on to your beneficiaries. The way this is taxed depends on your age at the time of death. If you’re under 75, your beneficiaries can typically receive the money tax-free – either as a lump sum or as income.

If you’re 75 or older, the money will be taxed at the recipient’s marginal rate. You can nominate who you’d like to receive your pension, and it’s worth reviewing this regularly to make sure it reflects your wishes.

Taking cash won’t be right for everyone. There’s a lot to think through before deciding, and it can be complicated to understand what everything means for your own personal circumstances. If you’re unsure how much you can safely withdraw – or if you should withdraw cash at all – financial advice can help you make informed decisions and avoid costly mistakes.

Need more help?

Income Tax and Tax Relief calculator
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Retirement Contributions calculator
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Retirement Income Planner
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Emergency Tax tool
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Need help deciding?

Choosing how to access your pension is a significant decision, and you want to get things right. Speaking to one of our financial advisers can give you clarity and confidence that you’re on the right track. Chatting things through can make the world of difference.

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