Can I cash in my pension?

A question about : Can I cash in my pension?

Can I cash in my pension?

First, the background:

A pension scheme is a tax deferred savings vehicle that allows for the tax-free accumulation of a fund for retirement. Like many tax-free arrangements, they have legal rules attached to them. In the case of pensions, these rules firmly dictate the age, circumstances, and method by which the fund can be drawn. More specifically, these rules (with very few exceptions) mean that the fund cannot be drawn until age 55, and, even then, not entirely as cash.

So, can I cash my pension before 55?

For the majority of people, the answer is no. The only possible way to access your pension before this is if you have to retire due to serious ill health. There are also a few pension schemes (e.g. for specific groups like professional footballers or the armed forces, or there may be a previous right to pension from age 50 in the scheme rules) that do allow it - you should read your pension scheme T&Cs.

But there are companies offering to cash in my pension now...

These companies are flouting the regulations and should be avoided. You have to transfer your pension to the company involved, so the returns are almost guaranteed to be non-existent or even negative and the fees for the transfer will be steep. Added to that, HMRC will likely charge you 55% of the value of your loan in tax at some point (probably long after the loan has been spent). And, you still have to pay back the loan! A thread like this one shows what could happen (added 23/11/2012).

So when can I cash in my pension?

You can usually take your pension from age of 55. You can normally choose to take up to 25% of your pension pot tax free, sometimes more depending on the scheme. The rest of your pension can be used in a number of ways, such as buying an annuity.

Some pensions will have penalties for taking it this early and require you to take it at a certain age, such as final salary pension schemes. These schemes may also have complicated rules relating to Guaranteed Minimum Pension (GMP) that restrict the amount of cash available.

If your overall pension pot (so the total of all your pensions), add up to less than Ј18k or 1% of your life time allowance, you can take it all as cash and 25% will be tax free (i.e 75% will be taxed at your marginal rate of tax). There may be pension schemes wound up that also have similar rules applied.

However, you should plan to have more than this amount, otherwise you will be living very poorly during retirement.

Why should I bother putting money into a pension?

Although pensions have the above restrictions, they also have their benefits. A lot of companies offer to put money into your pension pot, which is essentially free money for your retirement.

You also get tax relief on your contributions. So if you want to put in Ј100, you'll only actually see Ј80 taken out of your pay packet for 20% tax payers, and Ј60 for 40% tax payers.

How much should I put into my pension?

The answer is basically - you get out what you put in. Martin Lewis has a small guideline that you should be putting half your age as a % of your gross salary. So if you start pension saving at 20 you should aim to put 10% of your gross salary away - this can include company contributions.

There are many pension calculators out there, however this one makes it clear what you could get at retirement - however, remember it's a prediction and isn't guaranteed.

Best answers:

• as this keeps cropping up as a question was kindly put together by tocsin
  made a "sticky" so it stays on the front page
• A noble attempt tocsin, but you and i both know this isn't going to stop the never-ending stream of the same question.
• True, but it is an excellent start so thanks.
• Just a suggestion that the phrase "due to serious ill health" should be "due to ill health".
  "Serious ill health" is a separate test in the tax legislation. Someone in "serious ill health" is someone whose life expectancy is less than one year. Such a person can take any previously untouched pensions entirely as a lump sum. If they are under 75, the tax rate is nil, otherwise it is their marginal income tax rate. The tax man is essentially recognising that he will probably get no income tax or IHT on the funds if you just leave them in your scheme, so he's got nothing to lose by letting you take them out immediately tax free.
• some obvious looking spammy posts removed and the replies after them to tidy thread
• Thanks for the information tocsin but I have one more question that you may know the answer to as your knowledge on the subject is far more vast than mine. If I leave a pension scheme and its deferred until im 60, can the rules be changed after its deferred? Specifficly can the deffered benifit age be bumped up to 70?
• Can I cash in my pension?...... if i decide to emigrate?
• NO. Unless you want to be scammed/taxed.
  There is Qrops, but I am thinking anyone who has done it has regretted it.
  In any case, you never coming back? What are going to live on in retirement any where you end up?
• Hi, I will be cashing in my pension because I will die in the next year. But how do I time it in view of the hideous fluctuations in the financial market? Is the best indication the ftse index? How do I get it posted and 'acted on' by the insurance company (AEGON) before it drops again? Should I hang on until the G20 meeting, which might boost the stock market? Any advice welcome.
• Sorry for your situation.
  Quote:
• Do you have sufficient money for your needs if you take it all now? If you take out part of it now? If so it may be best to do that, since what you're really asking is whether it's safe to leave the money invested in the hope that its value will increase. If you don't need that increase, you don't need to stay exposed to the risk of say another 20% drop if Greece defaults or lots of countries vote against the EU rescue package.
  If you do want to get some protection but still have a chance of gaining, as dunstonh wrote, you can use investments other than equities (shares), including corporate bond funds,savings accounts (even inside a pension).
  Do you actually need it all now even if you can take it now? If you don't plan to spend it all then you might take it and then pass it into the control of whoever you want to have the remainder a year from now. Then their own tolerance for risk and ability to handle drops could be used instead of your own. Since in this case it comes out of your pension but then is immediately invested again they don't have long out of the markets, just as long as it takes to move the money around and get it reinvested.
  If the amount is more than a few tens of thousands, certainly if it's hundreds of thousands, then you might also consider visiting unbiased.co.uk to find an IFA for some personal financial advice.
  But do consider carefully the question about what you're trying to gain by leaving it invested and whether you can get the same benefit by just doing whatever the person who will eventually have the money wants, instead of using your own possibly shorter timeframe. This may be the easiest and best solution.
• Thank you Jamesd and Dunstonh. It is only about Ј15,000 that I want to cash in and use, with adequate other income. The trouble is that the lump sum is rapidly dimishing and I am trying to decide whether to grab it or wait! Thanks for your sensible views. Very grateful.
• Unfortunately we are in troubled times and anything is possible. It's just a matter of waiting to see what happens. Greece could come out of it better than expected - which would help markets, but on the other hand, Greece could end up in the worst possible situation, and the markets would continue to fall.
  Personally (this is not financial advice!!!!!), if I were you I would take the money now if you can afford it, only because I'd rather make the most of the time left, rather than worry about losing money should the markets continue to fall.
• Perhaps grab it and invest half of it in the same investments? That way you either gain something or don't lose as much. No way to know how any plan would would out, things are too unsettled at the moment to even hazard short term guesses.
• Are there any circumstances (short of death!) where, once a pension is in payment it can be stopped,diverted or converted to a lump sum etc. This question relates to a pension of Ј240 per annum which is taking the recipient over the limit for basic benefits e.g. council tax relief and is therefore costing them money!
• Could they pay it into another pension and would it then not be counted as inome?
• What's the situation in the case of redundancy at age 50 -55?Can the pension be drawn under these circumstances?I will be 52 next April and fear the worst.