Freedom factor 4: Cash

Depending on what your provider offers, you may be able to simply take cash out of your pension pot, either in chunks or all at once.

Before you unlock this option, there’s a lot to think about, and you may want to consider taking guidance or advice. We can help with this. Read on!

Four feel good factors about cash

  ✔️ Flexibility and control

You can take as much or as little cash as you like and use it in any way you want. The one thing you shouldn’t do is put it back into your retirement savings – though you could put it into an ISA, for example.

  ✔️ Investment freedom

Taking cash out of your retirement savings can give you more freedom to invest it in a way that suits you, as you’re not tied to the investment options from pension providers. For example, as mentioned above you could put the cash into an ISA or another non-retirement investment arrangement.

  ✔️ Can be tax-efficient

Normally, a quarter of each cash amount you take is tax-free. And this doesn’t affect your personal income tax allowance (the amount you can earn in a tax year before you start to pay income tax – the standard allowance is currently £12,750 a year). You can manage the amount of tax you pay by being careful about how much you take out. Here’s an example.

• Let’s say you take £16,000 as cash.
• £4,000 is tax-free because a quarter is tax-free. This leaves £12,000 that could be subject to tax.
• Assuming you’re entitled to the standard income tax personal allowance of £12,570, the whole £16,000 could be tax-free, as the £12,000 is below the personal income tax allowance.

You can use a tax calculator, like this one from MoneyHelper, to work out how much tax you might pay on your cash.

  ✔️ Top up gaps in your incomes

If you’ve got other pension savings and are careful to manage the tax, taking cash to top up gaps in your income can be a good use of a small pension pot.

Four not-so-good factors about cash

  ❌ You could pay more tax than you expected 

If three-quarters of the cash you take, added to your other income for the tax year, pushes you into a higher tax bracket, you could end up paying more tax than you expected. Find out more about how tax works here.

  ❌ You could end up with less income in the future

Taking cash out of your pension pot now means there’s less in it for the future – even if you’re planning to pay more in. And, the money you take out will no longer benefit from investment growth within that pension pot. Could this potentially leave you without enough to live on? We can help you plan your retirement so your income is sustainable.  

  ❌ Investment and inheritance tax

Investment growth in a pension is generally tax-free. If you take cash out and invest it anywhere other than a tax-free ISA, you could be taxed on the investment growth. Similarly, money in a pension doesn’t usually count towards inheritance tax, but cash you take out would, as it becomes part of your estate.

  ❌ State benefits and debts

If you get any income-related State benefits such as Universal Credit, taking cash could affect the amount of benefits you get. Your cash will be taken into account when working out your benefits. Also, if you have debts, your creditors can get at any cash you take out of your pension.

Take care with tax allowances 

If you’re thinking of taking some of your retirement savings whilst still saving into a defined contribution pension, you could lose tax relief on future retirement savings.

When saving into a pension you benefit from tax relief, as long as the total amount is within the annual allowance. The annual allowance is currently £40,000 for most people. This allowance includes both your and your employers’ pension contributions into your pension pot, and any personal or stakeholder pensions you have outside of the workplace.

However – if you start taking your retirement benefits and still want to carry on saving for retirement, this allowance could fall to £4,000 (known as the money purchase annual allowance).

Helping you unlock your retirement freedom

If you’re thinking of taking your pension benefits within the next year, our retirement experts can help you unlock the options. Ask for a personalised options pack setting out your main options. You can then have a call with one of our friendly retirement experts to talk through how taking cash might work for you.

We can offer guidance to help you decide whether taking cash is a good choice for you. We can also offer paid-for advice with competitive charges to help you manage tax so you don’t pay too much.

Find out more about how our retirement experts can help you.