5 must-knows about releasing money from your pension

Since April many people have gained full access to their pension with fewer limitations than ever before. As well as releasing up to 25% tax-free cash, it is now possible to cash in your entire pot.


The flexibility of the current rules could open new doors and create opportunities for your future, but releasing money from your pension without knowing the rules could have unexpected effects on your later life income. Here are 5 key points to consider before taking pension release.

one pensionWithdrawing your entire pension pot

From the age of 55 you can withdraw your entire pension as one lump sum. This controversial new rule sparked concerns about people cashing in irresponsibly and being left destitute in retirement, but most people have been prudent with their cash.

Whilst removing all of the money from your pension may seem like a good idea, it is not suitable for everyone and could reduce the amount of income you will have in retirement.

Leaving your retirement savings in the form of a pension, for example by purchasing an annuity or taking pension drawdown, can provide a sustainable income throughout later life, whereas removing your money altogether may not.

Before cashing in your pension is it recommended that you seek professional financial advice to find out if it is the right option for your circumstances.

two pensionsTaking up to 25% tax-free cash

If you meet the following criteria you may be eligible to release up to 25% tax-free cash from your pension:

  • You must be at least 55 years of age
  • You must have an eligible pension; the state pension and unfunded public sector schemes are not suitable, but most company, private and final salary pensions are eligible
  • Your pension must be untouched, if you have already made withdrawals you will not be able to release tax-free cash

Releasing tax-free cash from your pension could allow you to use your retirement savings for other purposes aside from an income in later life, for instance some people decide to use their pension to tackle debt, make home improvements or purchase a newer car.

The remaining 75% or more of your fund is considered taxable income and withdrawing a large sum of money in one go could push you into a higher income tax bracket.

You could reduce your tax bill

You could avoid paying such a large tax bill by withdrawing smaller sums of money over several different tax years. Consider the following example:

Scenario 1: Cashing in your entire pot

  • Alan is 57 and has a pension worth £160,000
  • He earns a salary of £22,000 He takes £40,000 tax-free cash and withdraws the remaining £120,000 
  • His taxable income for the year is £142,000, so Alan loses his personal allowance
  • His overall tax bill for the year is £50,443

Scenario 2: Withdrawing smaller amounts over different tax years

  • Alan takes £40,000 tax-free cash and withdraws the remaining £120,000 as two lump sums of £60,000 over two years
  • His taxable income for each year is £82,000, so Alan keeps his personal allowance
  • His overall tax bill for each year is £22,203, which for both years combined is £44,406

    That’s a tax saving of £6,037!

four pensionsThere is more than one way to release money from your pension

Since the new pension rules were introduced there is more choice and flexibility available. You could enter pension drawdown and withdraw as much or as little as you like whenever you need it.

Another option is to spread your tax-free cash allowance across all withdrawals instead of taking it as one lump sum. Each withdrawal would have a tax-free portion of up to 25% and the rest would be taxable.

Not all options are suitable for everyone so it is important that you talk to a regulated adviser before releasing your pension.

You could have another pension that you didn’t even know about!

Losing track of a pension can be easily done when changing jobs or moving house. You may have left an old pension behind because you thought it wasn’t worth a lot, but it could be more valuable than you think.

There are around 1 million lost and forgotten UK pensions that are worth an average of £3,000 each, that’s £3 billion of pension savings going unclaimed!¹

If you think you may have lost an old pension it makes sense to try and find it before releasing money from another fund as it could boost your retirement income. Tracing a lost pension worth £3,000 could increase your tax-free cash amount by up to £750 – and with our help it won’t cost you a penny to find it.

If you have more questions on releasing money from your pension, there's further information on our frequently asked questions page 'How do I take money from my pension?'

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Pension release is not suitable for everyone as it can reduce the amount of income you will have in retirement. Tax treatment is dependent on individual circumstance and may be subject to change in the future.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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