Tempted to cash in additional pension pots?

There is nothing to stop you taking all the money out of your defined contribution pension pot and spending it as you wish. For many people this would be a foolish decision, but for some could be a sensible one.

If you are aged 55 or over with a defined contribution (money purchase) pension (ie one that is not based either on your final salary or career average earnings, commonly known as a defined benefit scheme) you can cash in all or some of your pension pot at any time – assuming your pension provider or scheme permits you to do so. Cashing in your pension is a big step and not a decision to be taken lightly.

Do you have other pension income?

However, it is something you could consider if you have other pension income, for instance from defined benefit (such as career-average or final salary) schemes, that will provide you with the income you need. Cashing in your pension allows you to use your pension savings in a variety of ways. You could choose to pay off debt, such as your mortgage or credit cards, buy a new car, pay for a holiday or perhaps use the money to buy assets that aren’t available via your current pension.

It is very important to understand and take into account the income tax you will have to pay on these withdrawals. The first 25% is payable tax-free. However, you need to realise that it is easy to trigger income tax of 40% or even higher on such withdrawals given the current tax threshold limits.

It is not advisable to cash in your pension without taking professional financial advice. Why not book an appointment now with one of our professional financial advisers? Call 08000 85 85 90 or email appointments@lighthousefa.co.uk.

Why Jack, aged 64, decides to cash in his additional pension pot

Jack, a widower aged 64, is ready to start enjoying life again. He has just agreed to retire early at the end of May 2019 and is fortunate to have built up a reasonable amount in his employer’s defined benefits pension scheme. He also has a small private pension currently worth £30,000. His main concern is to have enough money to live comfortably for what will hopefully be a long retirement. Unsure of his options and the tax implications of his decision, he decides to consult a financial adviser specialising in pensions.

The adviser asks Jack about his lifestyle and how he envisages his retirement. He also asks Jack for full details of all aspects of his finances – including how much he spends, his savings and borrowings, such as his mortgage.

Having gained a full picture of Jack’s financial circumstances, the adviser recommends he take advantage of pension freedom by cashing in his private pension. Jack will receive 25% (£7,500) tax-free and he will pay income tax at 20% on the balance of £22,500, as he will have no other income in tax year 2016/17.

This will give him a total income of £25,500, which he and his adviser have agreed is enough for him to live on comfortably until he starts to receive his defined benefit pension and state pension in 1 May 2017 when he will reach the age of 65.

To find out whether cashing in your pension pot is a suitable option for you book an appointment now with one of our professional financial advisers. Call 08000 85 85 90 or email appointments@lighthousefa.co.uk.


Important Information:

  • The value of your investments can go down as well as up, so you could get back less than you invested.
  • The value of your income from your investment / pension can go down as well as up.