Part of the April 2015 pension rules changes, made it possible to take your entire UK pension fund in one go as cash for you to spend as you wish.
You can do this from the age of 55. However, there are considerable tax implications to be aware of before doing this.
You can close your UK pension and take your fund as cash. The first 25% will be tax-free and the rest will be taxed at your highest tax rate. There may be charges for cashing in your whole fund, and not all pension schemes, particular workplace pensions providers will offer this option.
Some pension companies will require that you take financial advice before cashing in, which means you’ll need to pay the adviser a fee of around £1000.
How much tax do I pay if I cash in my entire pension?
If your pension pot and other sources of income combined are in excess of £150,000, you will pay tax at the highest rate of 45%. Spreading withdrawals over a number of years can minimise your tax bill and mean that your tax-free entitlement is spread over several years.
Emergency tax when cashing in your pension
When you cash in your pension, it’s likely that you’ll end up paying more tax than you need to. This is because your pension company won’t know what your personal tax code is, or how much income you earn from other sources.
Without this information, it applies an ’emergency’ tax code to your withdrawal. So you will be taxed on a ‘Month 1’ basis. This assumes that the pension income you earn from cashing in is 1/12th of your annual income.
A withdrawal of £20,000 is assumed to be part of a £240,000 annual income. This means you could lose some or all of your personal tax-free allowance, and could end up paying the highest rate of tax, 45%, on a good proportion of your pension cash.
You can quickly claim this back, by sending one of three forms to HMRC. You should be repaid within four weeks.
P55 is for those who take out a some but not all of their pension as a lump sum
P50Z is for those who take out all of their pension and are no longer working
P53Z is for those who take out all of their pension and are still working
Should I cash in my pension?
- You need to get your hands on the money quickly
- You’ve suffered from poor health and a guaranteed income for life might not be the best option
- You want to reinvest your money or have quick access to it
- You have several different pension pots and want to cash in one or two to give you more retirement income at the outset
- You’re likely to spend your retirement savings in a short period of time
- You want to avoid a hefty tax bill
- You want a regular income for you, your spouse or any other dependents after you die
- You’re not prepared to get financial advice first
Can I cash in my pension before age 55?
You can cash in your pension before the age of 55 but you will incur a 55% tax penalty, plus firms may charge up to 30% in fees.