The 2015 pension freedoms opened up a whole new set of possibilities for those with defined contribution pensions. Arguably one of the most tantalising is the ability to withdraw your entire pension pot as a cash lump sum, to do with as you will. That could be paying off your mortgage, investing the money or even splashing out on the holiday of a lifetime. In some cases you can also cash in a defined benefit – or final salary – pension. But even if you can take your entire pension pot as cash, it doesn’t mean you should. In this guide, we outline the rules, why cashing in your whole pension is often a bad idea and the handful of circumstances in which it’s worth considering.
Potentially, yes. If you have a private or workplace pension, you may be able to take your entire pension in one go as a cash lump sum.
The rules can vary between schemes though. Some pension schemes – especially workplace pensions – won’t let you take your whole fund at once.
And bear in mind that there can be significant tax implications to taking out your whole pension at once. Plus, it could increase your risk of running out of money to fund your retirement.
Yes. For one thing, you can’t cash in the state pension. This is paid as a regular income from the time you reach state pension age. State pension age is currently 66 and due to rise to 67 by 2028.
And some pensions – especially workplace pension schemes – may have rules which prevent you from taking the entire pot in one go. This is most likely to apply to defined benefit schemes or defined contribution schemes with certain benefits (such as a guaranteed minimum income).
Most personal pension schemes will let you take the entire pot as a lump sum if you want to. Check with the provider to be certain, though.
Under usual circumstances, you can’t access a personal or workplace pension until you reach the age of at least 55. If you take money out before then, you’ll usually pay a huge tax penalty. Anyone that tries to persuade you to do so is likely to be a pension liberation scammer. The normal pension access age is rising to 57 from 2028. The default age may be higher for some defined benefit workplace schemes.
This minimum age for taking money out of your pension applies whether you want to draw an income or to take the whole pension as a lump sum.
The only exception to the rule might be if you are unable to work due to disability or serious illness. In this case you might be able to access your pension early. If your life expectancy is less than a year, you might be able to take your entire pension as a tax-free lump sum.
There are plenty of reasons why cashing in your entire pension savings is often a bad idea. But there are also a few instances where it’s worth considering. Here are some of the key arguments for and against:
Yes, that’s absolutely fine. These days, many people hold money in more than one pension scheme. There’s nothing stopping you emptying one pot while leaving others intact. You’ll receive the first 25% of each pot tax-free. The remainder of each pot will be subject to income tax.
This might be a good compromise option. It would free up some pension cash while leaving the rest in place to fund your retirement.
The first step is to contact your pension provider(s) or the scheme administrator if you have a workplace pension. Ask if you can take your whole pension pot as a lump sum. If you can, the process should be explained to you clearly.
Even if you can’t cash in your pension directly, you may be able to transfer your pension to another provider that allows it. Again, not every scheme will allow transfers, but most will.
Exactly what needs to happen once you’ve set things in motion to cash in a pension will depend on whether you have a defined contribution or defined benefit pension. The first 25% of the money you withdraw will be tax-free. The rest will be subject to income tax.
If you have a defined contribution pension, by the time you reach age 55 you’ll have built up a “pot” of money. This pot is intended to be used to fund your retirement.
To cash the whole lot in, the pot will be valued on a certain date. The money in the pot will be transferred into a nominated bank account. Your pension account will be closed. There may be fees for cashing in an entire pot. Once the money’s in your bank account, you can do with it as you will.
If the value of your defined contribution pot is worth £30,000 or more, and it has a guaranteed annuity rate attached to it, there’s a legal requirement to seek professional financial advice before cashing it in. That’s assuming your scheme allows you to cash it in at all.
If the value of a specific pension pot is £10,000 or less, you can cash it in without triggering the money purchase annual allowance. You can also withdraw pots worth less than £10,000 without incurring a penalty if your total pension savings exceed the Lifetime Allowance. Some providers that don’t usually let you take your whole pension pot might allow you to do so under small pot rules.
You can use this rule 3 times for personal pensions. The rules are different for workplace pensions, so check with your provider.
Rather than having a pension “pot” with a clear monetary value, defined benefit pensions pay you a guaranteed income in retirement. This income is based on a proportion of your salary while you worked for an employer.
Before you can cash in a defined benefit pension, you’ll usually need to transfer it into a defined contribution pension pot. To work out how much you’ll get, its value will be converted into a “cash equivalent transfer value”. This will take into account factors such as your age, the scheme retirement age, the cost of living, average life expectancy and the scheme costs and returns. Check with your scheme administrator how this will work and how much you’d be likely to get. Bear in mind that you’ll be giving up significant benefits by transferring a defined benefit scheme.
If you have more than £30,000 in your pension, you must get regulated financial advice before transferring it to a defined contribution scheme. Some defined benefit schemes won’t let you transfer to a defined contribution scheme at all. This mainly applies to certain public sector pensions, such as The Teachers’ Pension.
Once the money from a defined benefit pension has been transferred, you can withdraw it as a lump sum in the same way as any other defined contribution pension.
If the total value of all of your pensions (excluding the state pension) is £30,000 or less, you may be able to cash in a defined benefit pension directly from the age of 55. This is known as “trivial commutation”. Under these rules, you don’t need to transfer your defined benefit pension into a defined contribution scheme to cash it in. You don’t have to “commute” all of your defined benefit pension schemes, if you have more than one. However, you can’t commute part of a single scheme.
When you withdraw your full pension, the first 25% will be tax-free. This is known as the tax-free pension lump sum.
You’ll pay income tax on the rest. The rate will depend on how much your pot is worth and whether you have any other taxable income in the tax year.
As a reminder, here are the income tax bands and rates for the 2024/2025:
| Annual taxable income | Tax band | Tax rate |
|---|---|---|
| Up to £12,570 | Personal allowance | 0% |
| £12,571–£50,270 | Basic rate | 20% |
| £50,271–£125,140 | Higher rate | 40% |
| More than £125,141 | Additional rate | 45% |
As a hypothetical example, let’s say your pension was worth £100,000 and you decided to withdraw the whole lot during the 2023-24 tax year.
If, on the other hand, you split your withdrawals evenly across at least 2 tax years (so £50,000 per year), assuming no other income and no changes to the bands, you’d stay within the lower-rate tax threshold in both years. You’d still get £25,000 tax-free in the first year, but your total tax bill across the 2 years would only be £9,972. That’s a tax saving of more than £7,000.
Note: The tax bands and rates in Scotland are slightly different to the rest of the UK. You can see the standard rates on the Scottish government website.
One good piece of news. You don’t have to pay national insurance on pension income.
When you first take taxable income from your pension, HMRC might apply what’s called an emergency tax code. This is calculated on the basis of your taxable pension income in the first month. It’s commonly known as a “month 1” tax code. Effectively, it assumes that you will withdraw the same amount every month that tax year as you took out in month 1.
Let’s say the first (and only) withdrawal you make from your pension is the full value of your pension. This could result in you paying much more tax than you’re due. For example, if you withdraw the £100,000 we referred to in the example above, HMRC might assume this would lead to a total annual income of £1.2 million. (And pigs might fly.)
While this won’t be the case, HMRC doesn’t know this immediately. So it could result in you incorrectly paying upper-rate tax of 45% on some of your income. Very high earners also lose their income personal allowance, bumping up your tax bill still further.
If this happens, it’s not a total disaster. Those who have overpaid tax on pension income get it back no later than the end of the tax year. If you need (or just want) it sooner, you can claim it back before then. We explain the process in our full guide to overpaid pension tax.
Taking everything out of your pension can be a high-risk proposition. And once it’s done, it’s done. In theory, you can put the money you take out back into another pension. But you won’t get back the extra income tax you’ve paid or, in many cases, be able to regain the benefits you gave up. So, before you cash in the lot, have a thorough read of the arguments against it that we’ve outlined above. Among other risks, it could leave you short-changed later in your retirement.
Usually, there’s no obligation to take financial advice before cashing in a pension, though there are some exceptions to this rule. But, unless your pension is tiny, we’d still recommend getting input from an expert before you withdraw the whole lot. At the very least, take advantage of the free guidance you’re entitled to from the government’s Pension Wise service. And if your affairs are complex, your pension is worth a lot or you’ll rely on the money in your pension to live on in retirement, we’d recommend seeking tailored financial advice.
Yes. Under the pension freedom rules, introduced in 2015, you can take the first 25% of a personal or workplace pension as a tax-free lump sum.
This is a pretty generous tax break. Unless you immediately need more money than would be covered by the 25% tax-free lump sum, it’s well worth taking advantage of this benefit before resorting to cashing in your entire pension pot.
If you’re tempted to cash in your entire pension pot weigh up the pros and cons carefully. Make sure you’re fully aware of the implications for you and any dependants, especially if you have no other source of retirement income beyond the state pension. It’s worth considering alternatives for at least part of your pension pot, such as an annuity or pension drawdown. If you need help weighing up your options, take advantage of your free Pension Wise appointment. Consider speaking to a professional financial adviser, too.
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