Firstly, can somebody cash in their complete pot in 1 go. Well quite simply yes you can.
Under current UK pension rules the earliest anybody can access a pension is 55 (this is known as minimum pension age or MPA). Although it will be increased to age 57 on 6th April 2028.
You may be able to access a pension at age 50, but only in limited circumstances whereby you may have serious ill-health or a protected pension age of 50, connected to that specific pension scheme.
Whether you do access in 1 go, will depend upon the type of pension you have. But some key things to consider may be the tax implications, what do you do with the funds. What sources of income. will then fund future years during retirement. There could be a risk that you will run out of money in the future.
So does the process work ?
If you have a Defined Contribution pension (so a pension that has a value which goes up and down each day). You can access from age 55 under current UK rules. Whereby you can take as a complete lump sum amount.
Usually, the 1st 25% of the total pot value is tax-free and the remaining 75% would be taxable at source by pension provider. It would then be added to other earnings within that respective tax-year.
Key Points to consider:
If you take a lump sum you forgo the idea of receiving an income in future. Which is what a pension was designed to do.
How long would the process take to complete, could be done in a few weeks. So it’s a relatively straightforward process to implement.
Do you have any other pensions which could fund future years during retirement. Or is this your only pot.
If so can you fund future years on the state pension (currently £ 11,540 per annum payable from age 66). Or will you rely on partners or spouse’s pension arrangements.
At present any money held within a pension plan is growing tax-free and remains IHT within the pension wrapper. Once it comes out of the pension it will form part of your estate and may be subject to IHT in the event of your death if you don’t spend it.
I speak to people all the time through my day to day job. Whereby they access pot for numerous reasons. It may be to clear debts, or outstanding mortgage, could be for a holiday, pay for family wedding, home improvements or putting the children for University. Or it may be that they don’t believe in pensions. They may wish to invest that money in a different type of investment product.
Tax Implications:
Before making any decision to encase, it may be a good idea to attain actual figures from pension provider. So you are aware of the tax implications and don’t get a shock or an unpleasant surprise.
At present, the following tax bands apply within the Uk: (as of April 2024/2025)
Tax free personal allowance; £ 0 to £ 12,570
Basic rate 20%: £ 12,570 to £ 50,270
Higher rate 40%: £ 50,271 to £ 125,140
Higher rate 45%: Over £ 125,140
Most providers can quite easily provide you with illustrations ahead of cashing in.
If concerned do a simple tax calculation such as those on gov.uk
Remember, if you are in Scotland, you have different tax bandings and rates in place. Such as starter 19%, basic 20%, intermediate 21%, higher 42%, advanced 48%, top rate 48%.
If you do cash in the complete pot, it is considered as a one-off event. It will only relate to that tax-year in which you make that decision. It will not be carried forward to future years.
Be aware that it may push an individual into a higher tax bracket during that respective year. Which currently goes from April 6th to April 5th.
Your pension provider will normally tax your pension at source at the time you cash in. They will do it automatically their is no need to complete any other forms such as self-assessment.
What happens to pots below £ 10K
If the pot is under 10K, it can be done under the small pots rule, so will be subject to basic rate tax of 20%. If you are a higher rate tax-payer you will have to pay the extra yourself to HMRC.
What about pots over £ 10,000
If the pot is over 10K, it is no longer a small pots pension and the provider will apply emergency tax as a one off event. This may be at 40% or 45% dependent on your earnings. If so will your provider reclaim on your behalf and ask what is the timeframe to complete, it may be done at the end of the tax year. Or you can reclaim yourself by filling in the respective forms on Gov.uk. Whereby you should get your tax back in a much quicker timeframe normally around 30 days.
What about your dependents ?
If you do cash in the complete, there are no funds left in the pot to provide an income for spouse, partner or children.
If you die and haven’t spend all the pension funds, it will form part of your estate. Which could then be subject to Inheritance Tax rules and a further tax charge may apply.
What about any means-tested benefits ?
If you do access a pension pot it could affect any means tested benefits currently being paid. Or your entitlement to any in future years.
At present if you have capital over £ 16,000 you will have no entitlement to means-tested benefits. If you have capital over £ 6,000 your benefits could be reduced by £ 1 a week for every £ 250 of capital. Means testing takes account not only of a claimant’s income but also of their spouse or civil partner if they are living together.
If concerned contact the DWP or get a benefits check with somebody such as the Citizens Advice. www.citizensadvice.org.uk Whereby an adviser can explain specific key points in greater detail, which is free and impartial.
Will it have any impact on debts ?
A company or individual that has debts, cannot normally make a claim against your pension. Whilst still invested within the pension wrapper. However, once you access the funds, they could make a claim as your financial circumstances have changed, so it may be worthwhile speaking to them about your plans and the possible implications. Or you may speak to a debt adviser (again with the Citizens Advice) or company such as Stepchange, (stepchange.org.uk) whereby they again will offer free and impartial debt advice.
Are there any restrictions where I may not be able to cash in completely ?
The policy may have legacy benefits such a being in a S32 buyout plan which may contain safeguarded benefits.
Or if you have received a pension as part of a divorce settlement or Pension Sharing Order.
In these 2 circumstances it would be beneficial to check with your provider ahead of making that decision.
If I cash in a pension, can I still contribute to other schemes ?
If the pot is under £1o,000 and classed a small pots pension. it should no other affect on any other schemes you have.
If the pot is over £10,000, then you will trigger something called the MPAA (Money Purchase Annual Allowance) so you can still make contributions but your contributions are reduced from Annual allowance of £ 60,000 to a restricted amount of £ 10,000 per annum for every tax year moving forwards. If you aren’t working you are restricted to annual contributions of £ 2,880 net, which can be topped up to £ 3,600 gross per annum through added tax relief.
If you act within the small pots rule you can do across 3 pensions as long as they each below £ 10,000 and this decision will covers all your rights covered by that respective pension.
What if I have a Defined Benefits pension scheme ?
You may still be able to access as a one-off lump sum. This will be called “trivial commutation” or taking a “trivial lump sum“
As long as certain conditions are met:
- You are aged 55 or over, unless retiring through ill-health.
- the total value of all your personal and workplace pensions don’t exceed £ 30,000
- the pension in question allows trivial access.
- you have some Lifetime allowance left when you access the lump sum,
- You give up all rights held within the DB scheme.
- No previous lump sum has been paid in the past 12 months
If the idea of cashing in a pot may create disadvantage tax implications for a particular year. If may be more effective or tax efficient to access across several years by accessing such as Flexible Access Drawdown (FAD) or a number of lump sums (UFPLS – known as Uncrystallised Funds Pension Lump Sum)
It may be worthwhile ti take advantage of free and impartial information on the Moneyhelper.org.uk website.
Or you could get a free pension Wise appointment. Whereby a pensions guider will offer free and impartial guidance about the options and implications. Can be booked thought the pension wise website. To book telephone appointment call 0800 138 3944 or to get limited face-to-face in local Citizens Advice locations call 0800 138 1585.
If based outside Uk call +44 20 3733 3495, the appointment normally lasts between 45 minutes to 1 hour.
Remember !
If you found this blog post useful and informative. Please feel free to check out my other posts on https://moneyminted.co.uk covering pensions, savings, investing and recommended investing books. So you too can improve your investing knowledge to reach your financial aims and goals.
It’s not a get rich quick journey, but you will get there in the end if you create an action plan and think long term.
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