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Could taking cash from your pension be right for you?

Cash is a very flexible option, but you need to plan carefully to make it work efficiently for you. Take tax, for instance. Normally, only a quarter of the cash you take is tax-free – the rest is taxed like any other income. You’ll need to manage when and how much to take, so you don’t pay more tax than you need to.

Now, let’s take a good look at cash

Good things about cash

  • 1. Flexibility and control

    You can take as much or as little cash from your pension 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.

  • 2. 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, you could put your cash into an ISA or another non-retirement investment arrangement.
    Find out how we helped Teresa get better value from her retirement income by  taking cash.
  • 3. 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 £12,570 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.
    • One-quarter of this - £4,000 - is tax-free.
    • This leaves £12,000 that could be taxed.
    • If you haven’t got any other income in the tax year – and 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.
  • 4. Top up gaps in your income

    If you’ve got other sources of income and are careful to manage the tax, taking cash to top up gaps in your income could be a good use of a smaller-sized pension pot.

Not-so-good things about cash

  • 1. 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 income tax bracket, you could end up paying more tax than you expected. You might also have to pay an extra tax charge if your cash takes the amount of your benefits over the lifetime allowance. Find out more about the lifetime allowance.
  • 2. You could end up with less income in the future
    Taking cash from 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 in your pension pot. Could this potentially leave you without enough to live on? We can help you plan your retirement so your income is sustainable.
  • 3. 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.
  • 4. 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 while you’re still saving into a defined contribution pension, you could lose tax relief on future retirement savings.

When you’re saving into a pension you benefit from tax relief, as long as:

• your own contributions (to all your pensions) are less than 100% of your salary, and
• total contributions (again, to all your pensions) are within the annual allowance – currently £60,000 a year for most people.

This allowance includes your and your employer’s contributions to your pension pot, and your contributions to any personal or stakeholder pensions you have outside work.

However - if you start taking your retirement benefits and still want to carry on saving for retirement, this allowance could fall to £10,000 a year (known as the money purchase annual allowance). The money purchase annual allowance usually applies if you take cash, other than tax-free cash, start taking flexible income, or buy a fixed-term annuity.

But first... a warning

Pension scammers are always changing their tactics to keep up with the times. They may pretend to be from Pension Wise or the Department for Work and Pensions – but these organisations would never contact you out of the blue. Keep your pension savings safe by checking the latest ScamSmart news.

Visit ScamSmart

We can help you maximise your potential

Pension Potential offers expert guidance and lots of support to help you understand more about your retirement options.

We don’t offer financial advice through Pension Potential. But, if you decide you need financial advice, we can refer you to our expert financial planners who offer this service.


Guidance is intended to help you understand your retirement options. It won’t make specific recommendations or tell you what you should do.

  • Personal insight gives you a personalised overview of the options available to you, but won’t recommend which option would be best for you.
  • Tailored insight enables you to use our annuity finder to search the market and buy an annuity. Any fees will be paid by commission from the annuity provider.
  • Expert insight offers the option of talking to an expert who will give you help and guidance, but won’t be able to recommend specific options unless you decide to take, and pay for, financial advice. They can discuss this with you.

Financial advice

Financial advice is a regulated professional service that will take your situation into account and make recommendations for options and products.

You may need financial advice if you’re interested in more complicated retirement options such as flexible income (drawdown), or mixing two or more retirement options.

You’ll need to pay for financial advice. We offer financial advice from highly-qualified chartered financial planners, with competitive charges.

Download our financial planning guide


We’ll always tell you in advance if there’s a charge for any guidance or advice you take from us.

Help to make decisions you won't regret

Here at Pension Potential, we’re experts on the pension freedoms. We’ve helped lots of people like you reach their retirement potential. We can look objectively at your personal and family situation and suggest whether taking cash from your pension is suitable for you, or whether one or more of the other pension freedoms would be better.
Ask for a free, no-obligation Pension Potential pack showing your personalised options for taking your pension savings.
Download your pack from the Pension Potential hub 
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  • Personal insight

    Go to our Pension Potential hub to get a free retirement pack with personal insights just for you.
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  • Tailored insight

    If guaranteed income (an ‘annuity’) appeals to you, use the Pension Potential annuity finder to shop around for your own tailored annuity.
    Go to the Pension Potential hub to access our annuity finder
  • Expert insight

    Once you’ve looked into your options, ask for a call with one of our friendly retirement experts.
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