Cashing in pension

Cashing in pension funds can be performed from the age of 55 by individuals who hold relevant UK pension schemes and are looking to receive the benefits from their pension.

Cashing in pension funds may be done before your chosen retirement date in a process that is known as pension release. Cashing in pension funds through pension release allows you direct access to your pension benefits to use how you require.

The state pension cannot be released, and neither can any pensions that you are already drawing benefits from.

If cashing in pension funds early through pension release is a viable option for you then you may be able to release up to 25% of your fund as a tax free cash lump sum. This amount is completely free of tax and does not affect your tax position. The residual amount remaining after taking this sum may then be either reinvested into a pension fund or used to provide an income which is taxable at your relevant tax threshold.

If you wish to provide an income after cashing in pension funds, you may either take the income through the purchase of an annuity or by using your pension fund to provide an income directly, known as income drawdown.

Annuities are designed to be taken at retirement to provide you with a guaranteed income for the rest of your life. This income is provided by an insurance company who purchase your pension funds in exchange for the annuity contract. The annuity you receive will be dependent on a number of factors such as your age at retirement, gender, any medical issues, current annuity rates and more.  The annuity you receive is non-transferable and is designed to pay out for life.

Income drawdown is an alternative option when cashing in pension funds that is open to you should you not want to purchase an annuity at this point. Income drawdown allows you to take the income directly from your pension funds and can be varied each year depending on the amount you require up to relevant 100% GAD limits. With income drawdown you still own your fund and on your death it can be passed on to any beneficiaries you choose. It must be managed carefully as the risk is that over time you draw more money from the fund than can be sustained by the fund’s growth.

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.