Taking All Your Pension

Should You Take All Your Pension?

Can I take my entire pension pot in one go?

The answer is yes. In short, the new Pension Freedom rules allow you the option to take all of your pension pot in one go as a cash lump sum.

However, taking your pension as a whole will be subject to pension tax implication. Let’s assume that you have a pension pot with a value of £100,000. If you decide to take the entire value as a cash lump sum, the first 25% of this lump sum is tax free. £25,000 will be paid to you without suffering any tax liability. Yet, the remaining 750,000 of your pot is taxed as though it was income. The taxman treats this 75% of the pension lump sum just like your salary.
Once you reach the age of 55 this option becomes available but you should think carefully and plan for this major decision. It really depends on what you intend to do with your retirement savings.

Taking whole of your pension pot means that you are free to spend the cash on whatever you like. However, leaving your pension pot empty can sometimes be a poor choice for future needs. Money in your pension pot allows you to generate a retirement income in the future. Keeping this money in your bank account to fund retirement in the future exposes this capital to inflation risk. Inflation over time will erode the value.

Maybe you plan on passing money onto your loved ones which makes pensions a great place to leave your money invested. Majority of pensions are protected from inheritance tax when you die meaning this money can be transferred to your beneficiaries tax free. Also, leaving money in your pension pot can benefit from tax free investment growth.

On the other hand, taking your pot as a whole can be a great way to assist with paying off debt such as mortgages or for one off purchases. There is no right or wrong way to access your pension. It all comes down to your goals and needs at retirement age.

A key thing to note is that once you take your pension as a whole cash lump sum, you cannot reverse this decision. Only £4,000 per year can be saved into a new pension under the pension Freedom rules. This could make you think twice before accessing a very large pension pot.