Cash may not be king

Pension savers risk a significant tax bill

For most people over the age of 55, it is now possible to cash in or unlock all of your pension. How you take these benefits will depend on the type of scheme you have and how you want to take benefits. But concerns have been raised that some savers may risk running out of cash if they siphon too much out of their pension pots.

There are a number of downsides to taking too much cash from your pension, especially if you are doing it earlier than expected. However, around one in ten (10%) planning to retire this year expect to withdraw their entire pension savings as one lump sum, risking a significant tax bill and an impact on their future retirement income.

The findings[1] are part of unique annual research into the financial plans and aspirations of people planning to retire in the year ahead, and they show that one in five (20%) retiring this year will risk avoidable tax bills by taking out more than the tax-free 25% limit on withdrawals.

Two thirds planning on retiring early

However, they are not necessarily spending all the cash – the main reason given by those taking all their fund in one go was to invest in other areas such as property, a saving account or an investment fund (71%). Interestingly, around two thirds (66%) of people are planning on retiring early.

Since the launch of pension freedom reforms in April 2015, more than 1.1 million people aged 55-plus have withdrawn around £15,744 billion[2] in flexible payments.

Taking advantage of pension freedoms

Government estimates[3] show that around £2.6 billion was paid in tax by people taking advantage of pension freedoms in the 2015/16 and 2016/17 tax years, with another £1.1 billion raised in the 2017/18 tax year. The most popular use of the cash is for holidays, with 34% planning to spend the money on trips. Around 25% will spend the money on home improvements, while one in five (20%) will gift the money to their children or grandchildren. Other popular uses include buying cars or paying off mortgages.

Don’t get penalised by the tax system

Pensions freedom allows you to have the flexibility on how and when you spend your money without being penalised by the tax system, but it is worrying that some retirees may withdraw more than the tax-free lump sum limit. The risk is even greater if you’re taking all of your pension fund in cash. To review your own situation, please speak to us. You can call us to arrange an appointment or ask a question – we look forward to hearing from you.

Source data:

[1] Research Plus conducted an independent online survey for Prudential between 29 November and 11 December 2017 among 9,896 non-retired UK adults aged 45+, including 1,000 planning to retire in 2018.

[2] 2018.pdf


A pension is a long-term investment.

The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Pensions are not normally accessible until age 55. your pension income could also be affected by interest rates at the time you take your benefits. the tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

The value of investments and income from them may go down. you may not get back the original amount invested.

Past performance is not a reliable indicator of future performance.

What you need to ask yourself before cashing in your pension pot

Q: Have you considered what the tax implications are?

At the heart of any pension transaction you undertake, tax planning is a major consideration. Only the first 25% of the amount that you drawdown from your pension pot is tax-free, and the remaining 75% is taxed as earned income.

Q: Will your money last the duration of your retirement years?

Before taking the cash, it is crucial to think about whether you will have enough money to last the duration of your retirement. It’s not a one-off decision: you should regularly review your choices throughout your retirement, as your needs evolve and income needs may change.

Q: Will your pension scheme allow you to cash in your pension pot?

If you’re convinced that cashing in your pension pot is the right move for you, you need to ensure that your pension scheme allows you to do so. If not, it means that you’ll need to transfer your savings into a suitable pension scheme to be able to access your cash.

Q: Are you aware of the companies running pension scams?

Pension savers getting scammed out of their retirement savings is a real issue. The problem is that many of these scams look perfectly legitimate so are not easy to spot. Others offer investment returns which are too good to be true. You can visit the FCA’s ScamSmart website, which includes a warning list of companies operating without authorisation or running scams –

Q: Have you sought professional financial advice about your plans?

Not seeking professional financial advice can be very risky, especially when it comes to deciding how to eventually take your pension. If you get it wrong, it could be very costly and have a considerable impact on your retirement lifestyle and standard of living. We’ll make sure that the action you take is the right one for you, your family and your needs.

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