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Tax free cash

When retiring you can normally take up to 25% of your pension savings as a tax free lump sum.

Key facts

  1. Tax free cash can be a great way of paying for one off expenses at retirement, such as repaying the mortgage, a new car or the trip of a lifetime.
  2. If you are planning to go into drawdown you can take your tax free cash in stages to make your income more tax efficient.
  3. When buying an annuity you need to make your decision at the outset as once you have bought your annuity you cannot change your mind.
  4. Remember a pension is designed to give you an income in retirement, so we suggest only taking a substantial lump sum if you really need it.
  5. You don’t have to take it – it’s simply a choice that’s available. If you do take it, remember your remaining retirement income will be smaller. 
Reading time

5 mins

 

What you need
An understanding of pension freedoms

Up to 25%

You can take up to 25% of the value of your pension savings as tax free cash

Flexible
Can be taken any time from the age of 55
Tax
Anything more than 25% will incur income tax

Tax free cash

When retiring you can normally take up to 25% of your pension savings as a tax free lump sum.

Once this has been taken, any further withdrawals are taxed as income.

Watch our short explainer video to find out more.

The good things about tax free cash

Tax free

It's free of Income Tax.

Flexibility 

You can spend it or use it as you like, and there's no need to do anything else with the rest of your pension savings until you're ready.
 

The not so good things about tax free cash

Might need the money later

Once the money is spent, it's gone and you may find out that you needed it to support you during retirement.


State Benefits and debt

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.

Tax 

Once you've taken your tax free cash, anything else you take from your pension will be taxable. 

“Taking tax free cash can be a great way to meet one-off costs or to repay debts as you begin retirement.

However, taking tax free cash "just because it's there" may not always be the best idea.”

Josh Gordon BA (Hons) FPFS
Head of Financial Planning

financial adviser in the office
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What should I do next?

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Use our fast tool without providing any personal information to explore how your pension pot size and age affects the type of lifestyle in your retirement.
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