Should I take my tax free cash from my pension !
Is a very common question I get asked when speaking to people through my daily employment. About how they go about accessing a private or workplace pension.
You should only take a tax-free lump sum from your pension if you have a clear plan.
Or a specific and immediate financial need for this sum of cash.
If you don’t need it, then leave it invested.
As it stays within the tax free pension wrapper and can continue growing tax-free. Until such point you may decide to access.
Don’t free that you have to access funds, because you have reached minimum pension age being 55, soon to rise to age 57 with effect from 6th April 2028.
Or if a provider has written to you, due to its selected retirement date or default age, being attained.
You can access funds anytime you wish later on.
Maybe it’s more worthwhile to access at a point in time when you retire and you actually need this sum of money to fund lifestyle, hobbies during retirement.
Which a pension was originally designed for.
So let’s look at some examples when you may decide to access.
You have clear goals:
- You can use the cash to pay off high-interest debt
- you may wish to clear a mortgage earlier than expected.
- or fund a major life purchase, such as car, home improvements, once-in-a-lifetime holiday.
- It could be a deposit for children getting on the property ladder as 1st deposit.
- Or paying to get children through University.
- You could use it to retire early, or bridge income gap until other pensions start.
So before you do decide to access – ask yourself – why do you need a specific sum of money and what are you going go to do with it ?
You are permitted to withdraw up to £ 268,275 across all your pensions as tax-free cash. (under current rules as per 2026 / 2027 tax year)
It is possible to do something called staged or partial drawdown in that you can allow a portion of the tax free amount say 10%.
You don’t have to access all the 25% upfront in 1 transaction.
Some reasons not to access the tax-free cash.
- The remaining funds stay invested and can grow tax free and could be substantially larger before you actually need to spend it.
- At present the money invested is IHT free. Pensions usually fall outside your taxable estate for Inheritance Tax purposes, making
them a very efficient way to pass wealth to loved ones. (although the rule changes in April 2027) - Income security – taking a large lump sum reduces the pot value. So lowers the amount of income available to support you through
your retirement years.
Don’t act in haste or rumours !
As we have seen in recent years, there have been widespread rumours. In that the amount you can take will be reduced or abolished.
These rumours didn’t materialise, but lots of people acted in haste.
Be aware that once you access tax-free from your pension it cannot be undone or altered.
You don’t get the option to change your mind at a later date.
Just shy of one million pension plans (961,575) were accessed for the first time during the 2024/25 tax year, with a total of £18.0 billion to £18.3 billion withdrawn as tax-free cash.
As pension plan holders rushed to pull funds due to pre-Budget speculation regarding potential cuts to tax-free lump sums and upcoming changes to pension inheritance tax rules.
The way you access your tax free cash also depends upon which type of pension you have, is it DB or DC.
Defined benefit option:
A defined benefit pension (or final salary pension) is now a less common type of workplace pension.
Normally restricted to large employers, or NHS, Civil Service, teachers, local authority etc.
The retirement value is calculated based on the number of years you worked at the company and your average salary during those years.
What we call salary, length of service and accrual.
So the longer you period of service the better income you option in later years at normal retirement (known as NRD)
You will receive a tax-free portion limited to 25% of the value of the scheme.
But you then have to draw a defined income straight away, So with this option you cannot only access your tax-free cash only, you access the complete pension.
As per the rules and calculations set by the scheme actuary an trustees running that pension.
But the good news is that the risk is borne by the sponsoring employer not the individual.
It will pay you an income for life, or spouse’s pension if you die, a per the scheme rules, set by the Trustees.
Defined contribution pension:
These schemes related to private pensions or workplace pensions such as Auto enrolment.
Whereby you and your employer contribute on a regular basis and it creates a pot value which goes up and down on a daily basis.
With this type of pension you can access your tax-free cash as a one-off event. Which is known as Flexible Access Drawdown (FAD)
So you can access the tax-free sum and leave the rest invested. It is normally moved into a new product and will be subject to ongoing fees, charges and investment risk.
It will be known as becoming crystallised in that you have accessed the pot.
See my blog post specifically on how drawdown works:
https://moneyminted.co.uk/what-is-flexible-retirement-income-pension-drawdown
With drawdown you can carry on contributing subject to your annual allowance. Currently £ 60K per annum or a lower salary.
But be aware if you access any flexible income after taking the lump sum. You trigger something called the Money Purchase Annual Allowance (MPAA) which restricts contributions to £ 10K per tax year for tax-relief.
Again, see blog post on more details about how the MPAA works:
https://moneyminted.co.uk/what-is-the-money-purchase-annual-allowance
So, to recap before you decide to access some tax-free cash no matter how small. Give some serious consideration in what do you do with the new funds,
Plus, how will affect your pot value and future income in later years.
Remember:
If you found this blog post useful and informative, check out my other posts on pensions, savings and investment books I recommend via blog being https:moneyminted.co.uk
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