Taking a pension as a cash lump sum has become a popular choice amongst people retiring with less than £30,000* in their pension pot. It's important however to be aware of the tax implications of doing so, especially as it may mean you pay more tax.
*Retirement outcomes review, Financial Conduct Authority 2018
You pay tax when you take money from your pot because when you pay into your pension you get tax relief on your contributions.
The money you take out of your pension may push you into a higher tax bracket, potentially meaning you pay more tax than you need to. So you should consider carefully how much you take out and which tax year you take it in.
We’ve put together a few examples to show you how much tax you might pay if you chose to take 25% of your pension pot as tax free cash and the rest as a taxable lump sum.
The above calculations have been done using the emergency tax code for the 2022/2023 tax year.
remember these are just examples and the tax you could pay could be different
based on your own circumstances.
If you decide to take your entire
pension pot as a cash lump sum we will deduct the tax you owe before we pay you
You may pay emergency tax on the
money you take from your pension, which means you will receive less income
than you expected. You can claim back any overpaid tax from HM Revenue and
The amount you take from your
pension will be added to other income you receive from other sources during the
tax year and could mean you end up in a higher tax bracket.
Before taking money from your pension savings the maximum
amount you can contribute to a pension each year and still receive tax relief
is usually £40,000. Once you take money from your pension, you’re restricted to
contributing £4,000 gross towards any other pots you may have. This is known as
the Money Purchase Annual Allowance (MPAA).
For more details view our tax and your pension guide.
Your money needs to be working for you because of the impact of inflation. If you're worried about this then there are other options available that may be more suitable.
Your pension may need to provide you with an income to last your lifetime. Our examples give you an idea of how long your income could last in comparison to how long you're expected to live for.
It's important to discuss your retirement options with a financial adviser. They'll be able to help you decide on the right thing to do for your personal circumstances. If you don't have a financial adviser we've outlined reasons why you might benefit from using one and how to find one local to you.