Cash lump sum at 55 and over

Can I cash in my pension early?

Since the introduction of Pension Freedoms, you can cash in your pension early, either direct from your scheme or by transferring it into a new arrangement. The new rules allow you to cash in part or all of your pension as a cash lump sum. The first 25% of which is tax free and the rest is taxed at your normal marginal rate of tax.

The question is should you?

Can I cash in my pension early?

Cashing in your pension early

Most people on take part of their pension as a cash sum and use the rest to provide you with an income for life, which is also taxed as earned income. This tax free cash sum is known as the Pension Commencement Lump Sum or PCLS.

The tax treatment would depend upon your personal circumstances and may be subject to change in the future.

The FCA has strict suitability rules when cashing in your pension at 55, for the most part, it is not advisable. This is due to the simple fact that your pension is there to provide you with an income for your retired life. Cashing in your pensions earlier than your pensionable age would almost certainly reduce your eventual retirement income.

Cashing in your pension at 55 is known as pension release; whether it is a personal pension or a company pension. There are many reasons why people want to cash in their pensions early, such as starting a new business venture, buying a house,  paying off debts and credit cards.

You can cash in your pension even if you haven’t retired yet but need some cash now. If you’re 55 or over and have either a Personal Pension or old Company Pension you’re not currently receiving, you can cash in your pension even if it was originally set up to an older retirement age, of say 60 or 65.

The income you receive after cashing in a pension will depend on several factors including whether the money has come from a personal pension scheme or an occupational pension scheme. To an extent, you have much more choice about how the income will be paid from a private pension compared with an occupational scheme. You have the option of cashing in a pension without the need to take immediate income.

Can I cash in your pension early FAQs

Can I cash in your pension early – FAQ’s

Here are answers to some of the most frequently asked questions we receive when people want to cash in their pensions early.

Can I still work after cashing in my pension?

Yes you can still continue to work after you cash in your pension.

Can I cash in my pension before 55?

Yes you can cash in pension before 55. However only in exceptional circumstances, such as serious illness.

Can I take my pension as a lump sum?

Yes you can take your pension as a 100% cash lump sum. The first 25% is tax free.

How much tax will I pay if I cash in my pension?

The first 25% is tax free, which will not use up any of your Personal Tax Allowance. The rest will be taxed at your normal tax rate.

How long does it take to cash in a pension?

Once we have received your authorisation it normally takes round 4 to 5 weeks. However it can take longer, it is very dependant on your pension provider.

Can I cash in my pension to pay off debt?

Yes you can cash in your pension to pay off debts. See our guide paying off debts with your pension.

Pension Transfer Consultation

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Free Pension Transfer Guide & Consultation
If you would like to find out if transferring your pension or taking a cash lump sum is suitable for you, we can provide a free initial Pension Transfer Consultation known as abridged advice.

Simply complete your details below, and we will send you our Pension Transfer Consultation Pack and Enquiry Form.

As part of the consultation we will look at:

  • What existing pension plans you have in place.
  • What your plans are for retirement.
  • Your needs for flexibility and control.
  • The likely cost of more in-depth advice.

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Case Study: Cashing in your pension early

John has an old company pension, known as a Defined Benefit pension. It has a Cash Equivalent Transfer Value of £40,000.

  • John Smith is employed on a salary of £24,000 a year
  • Married to Joan who works part time on a salary of £7,000 a year
  • John is aged 57
  • No dependents (his children are grown up)
  • No savings

These are extremely good pensions with guarantees of what they will pay at retirement and normally John wouldn’t even consider taking benefits from it early, however, John is behind on his mortgage and owes the company £4,000. He also has a bank loan of £5,000 and an overdraft of £1,000.

All these debts came about because he was made redundant over a year ago and he has only just found new employment. He and his wife did have some savings but these have all been used up. He is making payments on his mortgage and bank loan now but the mortgage company are saying that if he doesn’t pay back his arrears they will repossess his house.

John and Joan have tried getting a consolidation loan but can’t because they have a bad credit rating; they’ve even spoken to Citizens Advice but they couldn’t help. None of their friends or family are able to help them either and every bit of money they earn each month goes out again just on living. It’s not as if they have luxuries they spend their money on that they could cut back on.

They have basically tried every avenue possible to try and solve their problem and it is only because they have exhausted every other option that they are now considering using John’s pension.

John is unable to take benefits early direct from his pension scheme so he is going to transfer it into a Personal Pension. He is then able to release 25% of the transfer value as a Tax Free Cash Sum, which is £10,000, leaving the rest of the money invested in his Personal Pension to take as an income when he eventually retires. He didn’t want it invested in something risky so he picked a low risk fund.

Transferring his pension means he has now lost all the very valuable benefits and guarantees that he would have got with his old company scheme and there are charges and costs involved with the advice he has been given and to set up the new plan.

However, John will still get a pension when he retires, albeit smaller than he would have otherwise got, and he and his wife can stay in their home and clear all their debts.

He made sure he fully understood what guarantees he was giving up and all the costs, charges and risks he would be taking by going ahead with Early Pension Release, this enabled him to make an informed decision.

Defined Benefit Pension Transfer Warning

Transferring away from a defined benefit pension scheme means you will lose valuable guarantees.

Taking benefits early will almost certainly reduce your pension income in retirement and is only suitable for a limited number of people and circumstances. This should not be seen as an easy option for raising cash.

If you release all your money from your pension early you will not have anything left to provide you with income in retirement.

When releasing cash from your pension, usually up to 25% is tax free, the balance is taxed at your marginal rate at the time and could change in the future.

Watch the FCA video explaining the expectations of financial advisers when advising you on defined benefit pension transfers.

Grove Pension Solutions Ltd is authorised and regulated by the Financial Conduct Authority (Reference number 465051).