Taking your whole pension pot in one go

When you reach the age of 55, you may be able to take your entire pension pot as one lump sum if you want. Whether you can do this and how you might do it will depend on the type of pension you have. But if you do, you could end up with a big tax bill, and risk running out of money in retirement. It’s important to get advice before you commit.

 

Taking your defined contribution pension in a lump sum

If you have a defined contribution pension, you’ll have built up a pot of money which, from the age of 55, you can use to withdraw from as you want. This includes the option of taking the whole amount as a single lump sum.  

How it works

When you take your entire pension pot as a lump sum – usually, the first 25% will be tax-free. The remaining 75% will be taxed as earnings.

If you’re thinking of doing this, it’s important to contact Pension Wise first.

Things to think about

Taking a lump sum won’t give you a regular income. So it’s worth considering what other income or savings you and any dependants will have to live on in retirement.

Tax implications

When money is taken out of the pension pot, any growth in its value is taxable, whereas it will grow tax-free within the pension pot.

You might want to take your entire pension pot in one go for any number of reasons. For example, to clear debts, pay for a holiday, or splash out on a big purchase.

But be aware that it will reduce the money you’ll have to live on when you retire. And you could end up with a big tax bill.

So it’s a good idea to work out the tax you’ll pay beforehand, so you don’t get a shock.

This pension pot calculator will not calculate tax accurately for individuals living in Scotland as income tax calculations are different. Get an estimate of how much tax you’ll pay.

For many people, it will be more tax efficient to consider one or more of the other options for taking your pension.

Your dependants

Taking your pension pot in one go means there will be nothing in that pension that could be used to provide an income to your dependants when you die.

If you die and you haven’t spent all the money you took out, any money remaining will count as part of your estate for Inheritance Tax purposes.

It’s worth being aware that taking a large lump sum from your pension could reduce any entitlement you have to state benefits now, or in the future.

This is because some state benefits are based on the income you have coming in, and the amount of savings you have.

Clearing debt

If you need to clear debts, it’s important to get specialist help before accessing you pension.

How do I take my pension pot in one go?

Check with your current scheme administrator or provider if they offer this option. If they do, they’ll explain the process and provide you any paperwork you need.

Not all pension providers offer the option to take your pension pot in one go.

So you might need to move your pot to a new provider and move into pension drawdown to do this.

Our investment pathways comparison tool could help you find a provider that offers this.   

There might be some circumstances where you may not be able to use this option. For example:

  • if you’ve received a share of an ex-spouse or ex-civil partner’s pension as a result of a divorce, or
  • if you have certain special features or guaranteed rights, such as a S32 Policy which contains Guaranteed Minimum Pension.

It’s important to check with your provider.

Tax you’ll pay

When taking a lump sum, 25% is usually tax-free. The other 75% is taxed as earnings.

Depending on how much your pension pot is, when it’s added to your other income it might push you into a higher tax band.

Your pension provider will deduct the tax. This is usually on an emergency tax basis before they pay you the money.

This means you might pay too much Income Tax and have to claim the money back. Or you might owe more tax if you have other sources of income.

Extra tax charges or restrictions might apply if your pension savings exceed the lifetime allowance (currently £1,073,100). Or if you’ve reached age 75 and have less lifetime allowance available than the value of the pension pot you want to cash in.

Continuing to pay in

If you take your pension pot in one go and you do not do this under the small pot lump sum rules (see below for more information) then this might affect how much you can continue to save for retirement.

The Money Purchase Annual Allowance for 2021/22 is £4,000.

Find out more about in our Money Purchase Annual Allowance guide

If you want to carry on building up your pension pot, taking a lump sum might not be suitable.

See below for how this is different if the value of your pension pot is less than £10,000. 

What happens when you die

Any remaining money that came from your pension pot will count as part of your estate for Inheritance Tax purposes.

Whereas any money that remains in your pension pot wouldn’t usually be liable for this tax. And if you die before age 75, it will pass tax-free to your beneficiaries.

Small pot lump sums

There are rules that allow you to cash in a small pension pot of £10,000 or less, if:

  •  you’ve reached age 55
  • the payment covers all your rights in the scheme.

You can use this rule three times for personal pensions.

The limit on workplace pensions is different, so you’ll need to check with the scheme provider.

Things to think about

There are various reasons why taking your whole pension pot under these rules can be beneficial:

  • Small pot lump sum payments can be made regardless of the value of your total pension savings – even if they exceed the Lifetime Allowance
  • Small pot lump sums might be available from providers that don’t otherwise allow you to take your whole pension pot.
  • Tax will be taken from your payment at the basic rate, and so you might not need to reclaim any.
  • Taking a pension as a small pot lump sum doesn’t trigger the Money Purchase Annual Allowance. So you can continue to contribute up to the full annual allowance, and benefit from tax relief on your savings. 

Taking your defined benefit pension in a lump sum

You may be able to take all your benefits under a defined benefit scheme as a one-off lump sum. This is sometimes called ‘trivial commutation’ or taking a ‘trivial lump sum’.

You might be able to take the whole of your pension as a one-off lump sum if:

  • you’re at least at least 55 or retiring earlier because of ill-health
  • the value of all your personal and workplace pensions (ignoring the State Pension) do not exceed £30,000
  • the lump sum must cancel all your pension rights under that scheme
  • the pension scheme’s rules allow trivial commutation
  • no previous trivial lump sum can have been paid more than 12 months ago – trivial payments made before 6 April 2006 can be ignored
  • you have some Lifetime Allowance available when the lump sum is paid.

Valuing your pensions

Your pensions will be valued in different ways depending on the type of pension and whether the pension is in payment or not.

Pensions not yet in payment

Type of pension
How to calculate the value

Defined benefit scheme

Multiply your annual pension before any tax is deducted and before any tax-free cash is exchanged by 20* at the date of the trivial commutation calculation. If your pension scheme provides a tax-free lump sum in addition to this, which doesn’t require you to give up any of your pension income in exchange, add this amount to the total too. 

For example:

  • income at calculation date = £500 x 20
  • value for trivial lump sum purposes = £10,000.

If a lump sum of £1,000 was provided separately, this would increase the value for lump sum purposes to £11,000.

*It is normally 20, but in some rare cases, HMRC may have agreed to the use of an alternative valuation factor greater than 20 so you should check with the scheme for confirmation. 

Defined contribution scheme

The amount that’s in your pot at the date of the calculation.

Cash balance plan

The value of the benefits as calculated in line with the scheme rules. The scheme should calculate this for you and confirm the value.

Pensions already in payment

Before 6th April 2006
Type of pension
How to calculate the value

Defined benefit scheme pension

Multiply the annual income you were receiving from the pension at 5 April 2006, before any tax was deducted, by 25.

Annuity

Multiply the annual income from the annuity you were receiving at 5 April 2006, before any tax was deducted, by 25.

Pension or income drawdown

Multiply the maximum annual income you could have withdrawn at 5 April 2006 before any tax was deducted (also known as the GAD maximum) by 25.

For example, the annual annuity income or defined benefit income you were receiving at, 5 April 2006 was £1,000 a year, the value would be £25,000.

After 5th April 2006
Type of pension
How to calculate the value

Defined benefit scheme pension

Multiply the annual income before any tax was deducted from the defined benefit pension, at the time you put it in payment, by 20*. You also need to add any tax-free lump sum you took at this time.

*It is normally 20, but in some rare cases, HMRC may have agreed to the use of an alternative valuation factor greater than 20 so you should check with the scheme for confirmation.

Annuity and Pension or income drawdown (including flexible, flexi and capped)

The amount you used to buy the annuity or the amount you moved (designated) into drawdown. You also need to add any tax-free lump sum you took at this time.

Overseas transfers

The value of the pension transferred overseas at the date transferred.

For example, if on 1 January 2021 you put a defined benefit pension into payment with:

  • an annual income before tax is deducted of £1,200, and
  • a tax-free lump sum of £3,000
  • the value for trivial lump sum purposes = £27,000 (£1,200 x 20 + £3,000)

Your other retirement income options

Taking your pension pot in one go could land you with a big tax bill.

For most people it will be more tax efficient to use one of the other options. 

Because of the risk of running out of money, it’s important to think really carefully before taking a lump sum to fund from your pension.

It’s important to get guidance or regulated financial advice before you commit, such as Pension Wise.

Pension Wise is a free government service that offers free, impartial guidance. It helps you understand what you can do with your pension pot money.

Scams

Beware of pension scammers contacting you unexpectedly about an investment or business opportunity that you haven’t spoken to anyone about before.

You could lose all your money and face tax of up to 55% and extra fees.

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impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

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MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

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