Cash Pension

Cash pension may refer to the cashing in of your pension so that you effectively take cash from it. To cash pension funds in you have to be over 55. You do not need to be retired but it is normally recommended as pensions are designed to provide an income for your retirement.

If you decide to cash pension funds in, you may take up to 25% of the fund as a tax free cash lump sum. This lump sum imposes no tax liability on you and it can be used how you wish (limits do apply however on you reinvesting the amount back into your pension). The residual amount (which is now crystallised) may then either be reinvested back into a pension or used to take an income.

Should you decide to reinvest once you cash pension funds in and take your tax free lump sum amount, you may allow the pension value to grow in the fund for as long as you need. There is now no upper age limit by when an annuity must be purchased and as such you can keep your funds in a pension as long as you wish until you decide to cash pension funds in.

When you do decide to cash pension funds in to take an income, you may take direct income from your pension fund through income drawdown (through either capped or flexible drawdown). This allows you take an income out of your pension whilst it continues to grow and allows you to vary the amount of income you take each year depending on your circumstances. However, as the income is coming directly out of your pension, it is possible that you could use up all your pension fund before your need to receive an income ends.

Traditionally, annuities have been the most common method to receive an income when people cash pension funds in. Annuities pay a level of income to you for life (they can increase each year if you choose an escalating option, otherwise they stay at the same level for life) and they cannot be varied in amount. As you purchase an annuity contract when you cash pension funds in for it, you do not take an income directly from your pension fund but actually receive it from the annuity provider. You trade ownership of your fund in order to reduce any risk that you will cease to receive an income to being a negligible one.

Any income you receive when you cash pension funds in outside of the tax free cash lump sum is subject to tax at your relevant tax rate.

Note: Releasing your pension benefits early could reduce your income at retirement and therefore is only suitable for a limited number of people and circumstances. The above is based on our understanding of current legislation and tax rules and are subject to change by the government. Tax reliefs referred to are those currently applying. Please note the value of investments can go down in value as well as up and you may get back less than you invest.