Taking your entire pension pot

The 2015 pension freedoms opened up a whole new set of possibilities for those with defined contribution pensions. Arguably one of the most tantalising is the ability to withdraw your entire pension pot as a cash lump sum, to do with as you will. That could be paying off your mortgage, investing the money or even splashing out on the holiday of a lifetime. In some cases you can also cash in a defined benefit – or final salary – pension. But even if you can take your entire pension pot as cash, it doesn’t mean you should. In this guide, we outline the rules, why cashing in your whole pension is often a bad idea and the handful of circumstances in which it’s worth considering.

Can I cash in my entire pension in one go?

Potentially, yes. If you have a private or workplace pension, you may be able to take your entire pension in one go as a cash lump sum.

The rules can vary between schemes though. Some pension schemes – especially workplace pensions – won’t let you take your whole fund at once.

And bear in mind that there can be significant tax implications to taking out your whole pension at once. Plus, it could increase your risk of running out of money to fund your retirement.

Does the type of pension affect my ability to take out my entire pension pot?

Yes. For one thing, you can’t cash in the state pension. This is paid as a regular income from the time you reach state pension age. State pension age is currently 66 and due to rise to 67 by 2028.

And some pensions – especially workplace pension schemes – may have rules which prevent you from taking the entire pot in one go. This is most likely to apply to defined benefit schemes or defined contribution schemes with certain benefits (such as a guaranteed minimum income).

Most personal pension schemes will let you take the entire pot as a lump sum if you want to. Check with the provider to be certain, though.

When can I take my entire pension as a lump sum?

Under usual circumstances, you can’t access a personal or workplace pension until you reach the age of at least 55. If you take money out before then, you’ll usually pay a huge tax penalty. Anyone that tries to persuade you to do so is likely to be a pension liberation scammer. The normal pension access age is rising to 57 from 2028. The default age may be higher for some defined benefit workplace schemes.

This minimum age for taking money out of your pension applies whether you want to draw an income or to take the whole pension as a lump sum.

The only exception to the rule might be if you are unable to work due to disability or serious illness. In this case you might be able to access your pension early. If your life expectancy is less than a year, you might be able to take your entire pension as a tax-free lump sum.

Is it a good idea to take my entire pension?

There are plenty of reasons why cashing in your entire pension savings is often a bad idea. But there are also a few instances where it’s worth considering. Here are some of the key arguments for and against:

Arguments against cashing in your whole pension

• A high income tax bill. As we outline in our tax example below, withdrawing your entire pension at once is likely to mean a higher income tax bill than spreading withdrawals over multiple tax years. And nobody wants to pay more to HMRC than they need to.
• Loss of the pension tax haven. While money from a defined contribution pension remains in its pension pot, any growth in value is tax-free. Take it out and any growth (from putting it in a savings or investment account, for example) becomes taxable.
• Your pension will become liable for inheritance tax (IHT). While it’s held within a pension plan, the money you’ve saved towards your pension doesn’t form part of your estate for inheritance tax purposes. Depending on the type of pension you have and how you’ve accessed the money, it can therefore potentially be used to provide an income for dependants after you die. Once you’ve withdrawn it, any money that you haven’t spent by the time the grim reaper comes knocking could be liable for inheritance tax, if the value of your estate exceeds the inheritance tax threshold.
• Potential loss of valuable benefits. Defined benefit pensions come with certain advantages. So do defined contribution pensions that pay a guaranteed income rate. Cash these pensions in and you’re giving up those benefits. You’re often required to pay for professional advice if you want to cash in or transfer these types of pension.
• Greater risk of running out of money. This is partly because of the higher tax bill and loss of benefits outlined above, which could leave you with fewer funds in the long run. But taking your full pension as a lump sum also means you bear even greater responsibility for making sure it lasts as long as you need it to. If you want a regular, guaranteed income, for you or your dependants, you’re better off leaving any defined benefit savings where they are and considering buying an annuity if you have a defined contribution pension.
• It will immediately trigger the money purchase annual allowance. Taking anything more than your tax-free lump sum substantially reduces your pension annual allowance. This is the amount of money you can pay into a pension each year and benefit from tax relief. It reduces it from a maximum £60,000 to £10,000 to be specific, and this is known as the money purchase annual allowance. So if you want to carry on building up your pension pot, taking your entire pot may not be the best course of action.
• Potential lifetime allowance penalties. If your total pension savings at the point you cashed them in exceeded the pension lifetime allowance, there’s 55% tax to pay on anything that exceeds this level. But if you took your pension on or after 6 April, 2023, there’s no tax penalty.

Reasons to consider cashing in your whole pension

• If you have an immediate need for the money and the pros outweigh the cons. For example, if doing so would allow you to pay off an expensive mortgage. This would still require careful thought though. Using your entire pension to pay off debt could leave you without enough to get by in retirement, unless you have other sources of income. The state pension alone is unlikely to be sufficient. If you don’t need your entire pension at once, consider taking out a smaller lump sum rather than cashing in the whole thing.
• If you’re in poor health and have a short life expectancy. If this is the case, you are unlikely to need the security of a regular income for life. You may prefer to have easy access to the cash so you can live your best life for as long as possible.
• If your pension savings are very small. If you’ve prioritised other ways of saving for a pension, such as investing in property, you may have very little in pension savings. If this is the case, taking your entire pension may do relatively little damage to your overall retirement income.

If I have more than one pension scheme, can I cash in one and leave the others invested?

Yes, that’s absolutely fine. These days, many people hold money in more than one pension scheme. There’s nothing stopping you emptying one pot while leaving others intact. You’ll receive the first 25% of each pot tax-free. The remainder of each pot will be subject to income tax.

This might be a good compromise option. It would free up some pension cash while leaving the rest in place to fund your retirement.

How do I cash in my entire pension?

The first step is to contact your pension provider(s) or the scheme administrator if you have a workplace pension. Ask if you can take your whole pension pot as a lump sum. If you can, the process should be explained to you clearly.

Even if you can’t cash in your pension directly, you may be able to transfer your pension to another provider that allows it. Again, not every scheme will allow transfers, but most will.

Exactly what needs to happen once you’ve set things in motion to cash in a pension will depend on whether you have a defined contribution or defined benefit pension. The first 25% of the money you withdraw will be tax-free. The rest will be subject to income tax.

Cashing in a defined contribution pension

If you have a defined contribution pension, by the time you reach age 55 you’ll have built up a “pot” of money. This pot is intended to be used to fund your retirement.

To cash the whole lot in, the pot will be valued on a certain date. The money in the pot will be transferred into a nominated bank account. Your pension account will be closed. There may be fees for cashing in an entire pot. Once the money’s in your bank account, you can do with it as you will.

If the value of your defined contribution pot is worth £30,000 or more, and it has a guaranteed annuity rate attached to it, there’s a legal requirement to seek professional financial advice before cashing it in. That’s assuming your scheme allows you to cash it in at all.

Cashing in small defined contribution pension pots

If the value of a specific pension pot is £10,000 or less, you can cash it in without triggering the money purchase annual allowance. You can also withdraw pots worth less than £10,000 without incurring a penalty if your total pension savings exceed the Lifetime Allowance. Some providers that don’t usually let you take your whole pension pot might allow you to do so under small pot rules.

You can use this rule 3 times for personal pensions. The rules are different for workplace pensions, so check with your provider.

Cashing in a defined benefit pension

Rather than having a pension “pot” with a clear monetary value, defined benefit pensions pay you a guaranteed income in retirement. This income is based on a proportion of your salary while you worked for an employer.

Before you can cash in a defined benefit pension, you’ll usually need to transfer it into a defined contribution pension pot. To work out how much you’ll get, its value will be converted into a “cash equivalent transfer value”. This will take into account factors such as your age, the scheme retirement age, the cost of living, average life expectancy and the scheme costs and returns. Check with your scheme administrator how this will work and how much you’d be likely to get. Bear in mind that you’ll be giving up significant benefits by transferring a defined benefit scheme.

If you have more than £30,000 in your pension, you must get regulated financial advice before transferring it to a defined contribution scheme. Some defined benefit schemes won’t let you transfer to a defined contribution scheme at all. This mainly applies to certain public sector pensions, such as The Teachers’ Pension.

Once the money from a defined benefit pension has been transferred, you can withdraw it as a lump sum in the same way as any other defined contribution pension.

Cashing in low-value defined benefit pensions

If the total value of all of your pensions (excluding the state pension) is £30,000 or less, you may be able to cash in a defined benefit pension directly from the age of 55. This is known as “trivial commutation”. Under these rules, you don’t need to transfer your defined benefit pension into a defined contribution scheme to cash it in. You don’t have to “commute” all of your defined benefit pension schemes, if you have more than one. However, you can’t commute part of a single scheme.

How much tax do I pay if I cash in my entire pension?

When you withdraw your full pension, the first 25% will be tax-free. This is known as the tax-free pension lump sum.

You’ll pay income tax on the rest. The rate will depend on how much your pot is worth and whether you have any other taxable income in the tax year.

As a reminder, here are the income tax bands and rates for the 2024/2025:

2024/2025 income tax bands

As a hypothetical example, let’s say your pension was worth £100,000 and you decided to withdraw the whole lot during the 2023-24 tax year.

• You’d get 25% of it (£25,000) tax-free, leaving you with £75,000 of taxable income.
• You’d face an estimated income tax bill of £17,432, including 20% tax on the amount between your personal allowance and £50,271 and 40% tax on the amount above this.

If, on the other hand, you split your withdrawals evenly across at least 2 tax years (so £50,000 per year), assuming no other income and no changes to the bands, you’d stay within the lower-rate tax threshold in both years. You’d still get £25,000 tax-free in the first year, but your total tax bill across the 2 years would only be £9,972. That’s a tax saving of more than £7,000.

Note: The tax bands and rates in Scotland are slightly different to the rest of the UK. You can see the standard rates on the Scottish government website.

One good piece of news. You don’t have to pay national insurance on pension income.

Emergency tax when cashing in your entire pension pot

When you first take taxable income from your pension, HMRC might apply what’s called an emergency tax code. This is calculated on the basis of your taxable pension income in the first month. It’s commonly known as a “month 1” tax code. Effectively, it assumes that you will withdraw the same amount every month that tax year as you took out in month 1.

Let’s say the first (and only) withdrawal you make from your pension is the full value of your pension. This could result in you paying much more tax than you’re due. For example, if you withdraw the £100,000 we referred to in the example above, HMRC might assume this would lead to a total annual income of £1.2 million. (And pigs might fly.)

While this won’t be the case, HMRC doesn’t know this immediately. So it could result in you incorrectly paying upper-rate tax of 45% on some of your income. Very high earners also lose their income personal allowance, bumping up your tax bill still further.

If this happens, it’s not a total disaster. Those who have overpaid tax on pension income get it back no later than the end of the tax year. If you need (or just want) it sooner, you can claim it back before then. We explain the process in our full guide to overpaid pension tax.

Can I cash in any of my pension without paying tax?

Yes. Under the pension freedom rules, introduced in 2015, you can take the first 25% of a personal or workplace pension as a tax-free lump sum.

This is a pretty generous tax break. Unless you immediately need more money than would be covered by the 25% tax-free lump sum, it’s well worth taking advantage of this benefit before resorting to cashing in your entire pension pot.

Bottom line

If you’re tempted to cash in your entire pension pot weigh up the pros and cons carefully. Make sure you’re fully aware of the implications for you and any dependants, especially if you have no other source of retirement income beyond the state pension. It’s worth considering alternatives for at least part of your pension pot, such as an annuity or pension drawdown. If you need help weighing up your options, take advantage of your free Pension Wise appointment. Consider speaking to a professional financial adviser, too.

Frequently asked questions

• How much tax will I pay if I take my whole pension pot?

  That depends on how big your pension pot is. You can take 25% of your pension pot tax-free. Anything above that will be liable for income tax, in the same way as employment income.

• Is it better to take my pension as income or a cash lump sum?

  There’s no clear-cut answer to this as it depends on your personal circumstances. But, as we’ve outlined above, there are numerous advantages to leaving your money in a pension plan rather than taking it out. One of these is the likely savings in income tax. If you spread taking a pension out across several tax years rather than withdrawing it all at once, you’ll almost certainly pay less income tax overall.

• Can I cash in the state pension?

  No. The option to cash in a pension is only available for personal and some workplace pensions. You can’t cash in your state pension entitlement.