Should I cash in my pension?

Should I cash in my pension? This is a question we're asked on an almost daily basis, and understandably so.

The temptation to take money out of your pension -either to spend or simply have it to hand – can sometimes be a strong one.

You might be thinking about making some home improvements, for instance, or booking a special holiday? Or perhaps you're retiring and just want it in your bank account so you can access it as and when you like?

There are a number of factors to consider before making this decision though.

The first is whether you'll be better, or worse, off by doing so. Any growth on the money you have in your pension will be tax-free, and will often outperform your savings accounts, so if you don't need to access all of your funds straightaway, it may be best to leave some of it where it is.

If you do need to take money out, however, consider if this will affect how much you are taxed. In most cases, a person can take out 25% of their pension tax-free. If they were to cash in the remaining 75% though, this can trigger a (sometimes unexpected) tax bill. And, this can be even more problematic if you're still earning a salary, as it could bump you up into a higher tax bracket.

Think about whether you'll want to continue paying into your pension too. If so, cashing it in can activate what's called 'the money purchase annual allowance' which then restricts what you can contribute from this point onwards.

And lastly, it's worth bearing in mind that when funds leave a pension they instantly become a part of your estate. This means, that if anything were to happen to you, the money could be subject to inheritance tax.

There are, as ever, some exceptions to this advice. Those who have pensions which are worth £10,000 or less, for instance, may benefit from cashing in the entire pension if they're eligible to take out what's called a 'small pot' lump sum.

Every case is unique, and there is no one-size-fits-all solution which is why it's so important to seek professional advice. 

To make sure that you are getting the most out of your pension(s), contact us on 01978 806505 or to arrange a free 60-minute consultation. Alternatively, you can fill in our contact form and we will get in touch with you.


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01978 806505

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