Withdraw some, or all of your benefits as a lump sum
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You don’t have to use all of your savings at the same time. You could use some of them now (for example take some cash), and keep the rest invested and decide what to do with them later on. Or, you may wish to take a lump sum and decide to invest in annuity with the rest. Or take a lump sum and draw the rest down as income.
You can take all of your Personal Account benefits as a cash lump sum. Typically, 25% of the payment will be paid tax-free, with the balance subject to your marginal rate of tax.
This option may seem attractive but it must be considered carefully. It all depends on your circumstances - you may have debts to pay off, for example, a mortgage. However, you should think carefully about how much you withdraw, as you could face the risk of running out of money at some point during your retirement.
The tax implications of withdrawing cash can be significant. Depending on how much you take from your savings, and other income you might also be receiving at the time, you could end up paying significantly more income tax.
Understanding marginal rate of Tax
You pay different rates of income tax on portions of your earnings. Your earnings include your salary and any other income you receive, such as income from any Secure Income (an annuity) or Flexible Income and any cash you take over the tax-free allowance (typically a quarter of your savings).
We have based these figures and examples on taxation in England, Northern Ireland and Wales. To calculate how much tax you may need to pay, including in Scotland, click on the link to the calculator below.
Most people have a personal allowance of £12,500* (2019/20 tax year), which is how much they can earn without paying any income tax. Then you pay tax on any income above the personal allowance, at different rates, as follows:
|Up to £12,500*||0%|
|£12,501 - £50,000||20%|
|£50,001 - £150,000||40%|
* For someone earning more than £100,000 the personal allowance decreases from £12,500 by £1 for every £2 earned over £100,000. Therefore, people earning £125,000 or more would have no personal allowance.
If your total income is more than £50,000, you pay 40% tax on the taxable income you receive between £50,001 and £150,000. For the rest you only pay tax at the rate of 20% or 0%.
If your salary is below £50,001, you do not pay higher rate tax. However, if you choose to take more than your tax-free allowance from your Personal Account, your total income goes over £50,000 you will pay 40% on the amount taken from your Personal Account, or more if your total earnings go above £100,000.
Understanding the impact of drawing benefits on future pension savings
If you choose to receive a Flexi Access pension or a taxable cash lump sum and plan to make further contributions, it is important to consider the following:
If your Personal Account is worth less than £10,000, you will be able to take the full amount as cash under the small pots rule and your future contributions may not be restricted. If you have more than one pension account worth less than £10,000, you may be able to apply this rule to up to three accounts.
If your Personal Account is worth more than £10,000, and you take and you receive any taxable income, either as a cash lump sum or draw down payment, the maximum you can contribute and still receive tax relief may be reduced to £4,000 per annum. This may be particularly relevant to you if you’re still working.