Cashing In Pension

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How do I Cash In My Pension?

You can cash in pensions from age 55. Up to the first 25% is tax-free, but if you take out more, you pay income tax on it. When cashing in your pension, you can minimise your tax if you spread your withdrawals over more than one Tax-Year.

1. Draw a lump sum from your pension. Up to the first 25% of your withdrawal is tax-free. If you take more than 25%, you’ll pay income tax on it. You can cash in all your pension pots in one go, but this might mean you end up paying a high rate Income Tax on some and possibly all of your money.

2. Take regular smaller cash withdrawals. You can take smaller cash amounts and spread them over more than one Tax-Year. You can take as much or as little as you like, and this should limit your income tax liability. When you die you can pass any remaining pension savings to your beneficiaries with no liability to Inheritance Tax.

3. Take a regular income. You can use your pension pot to buy an annuity from an insurance company. They’ll calculate how much income they can pay you until you die. The advantage is that your income is guaranteed – you take no investment risk. In fact, the insurance company takes all the risk because they might pay you more than the value of your pension pot if you live for longer than they expect. The trade-off is that the amount they’ll offer to pay you each year can be much less than you expect.

4. Don’t cash in your pension immediately and leave it to grow. Most pension plans are invested in a mix of assets including shares, property, bonds and cash. If you’re 55 and still working, you could leave your money where it is. The longer you keep your pension pot invested, the more likely it will grow. This means you could end up with a much better pension in the end.

Things to Watch Out For When You Cash In Your Pension

Bear in mind that you’ll have to pay some Income Tax. The first 25% is tax-free, but the remainder will be taxed as income under PAYE rules. If you take too much from your pension pot in one go you could end up paying higher rate tax and maybe even additional rate tax on your money. You can reclaim Income Tax if you’ve overpaid, but many pensioners who withdraw all of the money from their pension pots in one go will tell you they receive much less than they expected.

Withdrawing too much cash from your pension pot early in retirement will reduce how much you can take out later. The longer you can keep your money invested, the more chance it will have to grow.

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