Taking small cash sums from your pension pot

Money Advice Service

Under flexible rules introduced in April 2015 you can now use your pension pot to take out cash as and when you need it. However, there are tax implications and a risk that your money could run out.

How it works

You take cash from your pension pot whenever you need it.

For each cash withdrawal normally the first 25% (quarter) will be tax-free, but the rest will be added to your other income and is taxable.

There might be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year.

Things to think about

This option won’t provide a regular retirement income for you or for any dependant after you die.

Your pension pot reduces with each cash withdrawal. The earlier you start taking money out of your pot, the greater the risk your money could run out.

What’s left in your pension pot might not grow enough to give you the income you need to last you into old age – most people underestimate how long their retirement will be.

The administration charges for each withdrawal could eat into your remaining pot.

Because your pot hasn’t been reinvested to produce an income, its investments could fall in value – so you’ll need to have it reviewed regularly.

Charges will apply and you might need to move or reinvest your pot at a later date.

Once you take money out of your pension pot any growth in its value is taxable, whereas it will grow tax-free inside the pot – once you take it out you can’t put it back.

Taking cash lump sums could reduce your entitlement to benefits now or as you grow older.

To find out how income or savings can affect benefits, see our guides Benefits in retirement and Help with long-term care costs.

Tax you will pay

Three quarters of each cash withdrawal counts as taxable income.

This is added to the rest of your income and depending on how much your total income for the tax year is, you could find yourself pushed into a higher tax band.

So if you take lots of large cash sums, or even a single cash sum, you could end up paying a higher rate of tax than you normally do.

Your pension scheme or provider will pay the cash through a payslip and take off tax in advance – called PAYE (Pay As You Earn).

This means you might pay too much tax and have to claim the money back – or you might owe more tax if you have other sources of income.

Extra tax charges or restrictions might apply if your pension savings exceed the lifetime allowance (currently £1,054,700), or if you have less lifetime allowance available than the amount you want to withdraw.

See our guide to learn more on Lifetime allowance for pension savings.

Tax relief on future pension savings

If the value of your pension pot is £10,000 or more, once you start to take income, the amount of defined contribution 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 2019-20 the MPAA is £4,000.

If you want to carry on building up your pension pot this option might not be suitable.

Find out more about the annual allowance and Money Purchase Annual Allowance in our guide Tax relief on pension contributions.

What happens when you die?

  • If you die before the age of 75, any untouched part of your pension pot will pass tax-free to your nominated beneficiary or estate provided the money is paid within two years of the provider becoming aware of your death. If the two year limit is missed, it will be added to your beneficiary’s other income and taxed in the normal way.
  • If you die after the age of 75 any untouched part of your pension pot that you pass on – either as a lump sum or income – will be added to your beneficiary’s other income and taxed in the normal way.

The Lifetime allowance charge

If the value of all of your pension savings is above £1,054,700 (tax year 2019-20) when you die, further tax charges might apply.

Your other retirement income options

Taking cash sums is just one of several options you have for using your pension pot to provide a retirement income.

Because of the risk of running out of money, we recommend you think very carefully before using this method to fund your retirement income.

For an overview of all of your options and where to get help and advice see our guide Options for using your pension pot.

This article is provided by the Money Advice Service.

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Accuracy of Information – We try to make sure that all the information provided on Rest Less Money is correct at the time of publishing as we want it to be the most helpful resource possible. Sadly, we are not perfect however, and so we can make no guarantees as to the completeness, accuracy, adequacy or suitability of the information available on the site.
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We hope you find Rest Less Money a useful resource and we would welcome your feedback at [email protected] on how to make it even better. For more information on any of the above you can read our full terms and conditions.

Some important information about Rest Less Money

We want you to understand the positives, but also the limitations of using our site. We operate in a journalistic manner and therefore all information, guidance or suggestions provided are intended to be general in nature, and you should not rely on any of the information on the site in connection with the making of any financial decision.

When we set out to build Rest Less Money, we wanted to be a trusted place where you could find helpful information about financial matters affecting the over 50s. As a free to use resource, we try hard to provide the best information we can, but we cannot guarantee that we won’t occasionally make mistakes. So please note that you use the information on our site at your own risk, and we can’t accept liability if things go wrong.

Key things to remember when using Rest Less Money:

We do not offer financial advice – As a journalistic site, it’s important to know that we do not provide financial advice. You should always do your own research before choosing any financial product so that you can be certain it is right for you and your specific circumstances. If you are in any doubt, please seek professional financial advice from a regulated financial advisor.

No Liability – please note that you use the information on Rest Less Money at your own risk and we can’t accept liability for how you choose to use the information given on our site. We will often provide links to content or products and services available on other third-party websites. These are provided purely for your convenience and we cannot be held responsible for any content, or any of the products and services offered on any website that we link to.

 

Accuracy of Information – We try to make sure that all the information provided on Rest Less Money is correct at the time of publishing as we want it to be the most helpful resource possible. Sadly, we are not perfect however, and so we can make no guarantees as to the completeness, accuracy, adequacy or suitability of the information available on the site.
Whilst we work hard to try and provide accurate information, deals and prices can change, so whilst they may be correct at the time of writing, providers may subsequently decide to alter them later – so always double check first.

A final note on the Rest Less Community Forums – always remember that anyone can post their opinion on the Rest Less Community Forums, so it can be very different from our own opinion and may not be factual or well researched. Always be wary of any content posted on the forums and be sure to do your own research and due diligence on anything suggested. 

We hope you find Rest Less Money a useful resource and we would welcome your feedback at [email protected] on how to make it even better. For more information on any of the above you can read our full terms and conditions.

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