Cash

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.

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.

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.

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.

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.

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.

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.

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.