Can I cash in my whole private pension pot as a lump sum?

When you enter your fifties, you may start to wonder ‘When can I take my pension?’ but also ‘How much of my pension can I take?’

The short answers are: you can access and withdraw your pension pots from the age of 55 (this will rise in the future), and you can take out as much as you like – even the whole pot at once.

But a better question is whether you should access your whole pension at once.

There can be some serious drawbacks to taking too much money from a pension at once, and not only because it will run out sooner.

Here you can find out your options for taking a pension lump sum or sums, and the pros and cons.

If you’re considering cashing in your pension pot, it’s recommended that you seek independent financial advice. You can easily find a financial adviser with Unbiased’s smart matching tool.

What is pension freedom?

In April 2015 the government introduced something it called 'pension freedom' (also known as 'the pension freedoms'). It gave pension savers unprecedented control over how they can access their pension pots.

Previously, most people had little option but to use their pension pot to buy an annuity, which sometimes didn't suit their lifestyle.

Pension freedom retained the annuity option but opened up more ways in which people could take a pension - including taking the whole pot as a lump sum.

When can I cash in my whole pension pot?

If you have a defined contribution pension (most pensions are this type), then the rules allow you to access it flexibly from your 55^th birthday onwards.

However, people are often advised to wait much longer than this.

A pension pot needs to last for the rest of your life, and life expectancy at 55 is between 24 more years for a man and 28 more years for a woman.

Starting to draw your pension also limits the amount you can pay into it. So, as long as you are working and able to live off your earnings (and hopefully able to pay into your pension, too), you will usually be advised to leave your pension savings untouched.

For those with a defined benefit pension, you might be able to take all your benefits as a lump sum under 'trivial commutation' if your total pension value is under £30,000 and the scheme permits it. This option generally applies if you're at least 55 or retiring early due to ill health.

When you do retire, there are several different ways to draw your pension.

You should familiarise yourself with these before making any decisions. Seeing a financial adviser is also important, as the choices you make will affect the rest of your life and may be irreversible.

Cashing in your pension – i.e. withdrawing the whole amount at once – is technically possible. However, in most cases, it is best avoided.

We’ll now explore why.

How long does it take to receive a pension lump sum?

Usually it will take around four to five weeks from the date of your request for your pension provider to release your lump sum.

What are the dangers of cashing in my whole pension?

Taking too much from your pension at once could leave you with a large tax bill.

It is important to remember that most withdrawals from a pension count as income, and this income is taxed in the same way as a salary.

Find out more about how pension income is taxed.

What are the tax implications of cashing in my pension?

You can take 25% of any pension pot tax free. However, the remaining 75% will be taxed normally.

For example, if you had a pension pot worth £40,000, you could take £10,000 and pay no tax. If you then took out the other £30,000 in a single year (and had no other income), another £12,570 would be tax free (this is your personal allowance).

This leaves £17,430 subject to income tax at 20%. Your income tax bill for the year will, therefore, be £3,486. By taking your pension pot out all at once, you would have lost nearly 9% of it in tax.

Find out how much retirement income you might receive (before tax) from your private pension pot and how to boost it by using our Pension Calculator.

What are the other risks of cashing in a pension?

The other main risk of cashing in a whole pension at once is simply that of using up your pension too fast.

Put simply, if you want to take the whole sum at once, this suggests that you intend to spend it all (or most of it) in a single year.

This may be fine if this pension pot is just one of many that you have. But if it represents most or even all of your retirement savings, spending it all at once will leave you wholly reliant on the state pension.

Not only is the state pension generally considered too small to live on by itself, it may be some years before you can receive it (since state pension age is increasing over time).

What if I cash in my pension to invest it?

Perhaps you don’t intend to spend your pension pot all at once. But if that’s the case, why do you want to cash it in?

If your intention is to invest it, then you should bear in mind that your pension is already a very hard investment to beat. Growth on your pension is tax free, and you can choose from a range of investment strategies when you move into drawdown.

In short, you are unlikely to find an investment with higher returns without taking considerably more risk.

The warning about tax also applies. Any money you take out of your pension (over your personal allowance) will be taxed, so you would start out by making a loss before you could reinvest the money.

In most cases, therefore, it is best to take from a pension only as much money as you need at any one time.

Beware of pension scams

Pension fraud has increased now that people have more flexible access to pension pots.

Never make any major investments unless you have first cleared them with your independent financial adviser.

Most importantly, never respond to cold calls or unsolicited emails, and only use an FCA-regulated financial adviser whom you have chosen yourself.

What are my other options for using my pension pot in retirement?

It’s best to use your pension pot to provide a steady income for you over the long term.

There are two main ways to do this: by buying an annuity or setting up a drawdown scheme.

Find out more about ways to take your pension.

Can I cash in my pension before I’m 55?

If you have to retire early due to poor health, you may be able to access your workplace or personal pension before the age of 55 if necessary.

Your pension scheme will define the circumstances in which you would qualify for an ‘ill health pension’, i.e. one you can take early.

If you have a terminal illness and are predicted to live less than a year, you may be able to take all of your pension as a tax-free lump sum (provided you are under 75 and have an available lump sum and death benefit allowance).

If you are not in ill health to the extent of being unable to work, then you cannot legally access your pension before the age of 55.

There are fraudulent schemes that will offer you this option (sometimes call ‘pension unlocking’ or similar), but these are never in your best interests and involved breaking the law.

It may also mean losing most or all of your pension pot. Never talk to anyone who offers you this kind of scheme.

If you found this article useful, you might also find our article on the average pension pot in the UK informative, too.

Get expert financial advice

Cashing in your entire pension pot might seem like an attractive option, but it's crucial to weigh the potential risks and tax implications.

While pension freedoms provide enormous flexibility, it also comes with responsibilities.

Consider the long-term impact on your retirement finances and explore all available options, such as annuities or drawdown schemes, to ensure a steady income.

Remember, your pension is designed to support you throughout your retirement, so make choices that align with your long-term financial wellbeing.

Unbiased can quickly match you with a financial adviser for expert financial advice to ensure you make informed decisions about accessing and managing your pension pot.