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What are the impacts of cashing in your pension early?


People who want to take advantage of the flexible pensions rules could end up paying over the odds in tax, experts warn.

pension file

Savers can take money out of their retirement at a low tax rate which seems appealing but cashing in too much could cost more than they might be aware.

Quarter of pension tax-free

It’s possible to take a quarter of any pension savings free of tax.

Individuals will only be taxed at their marginal rate: 20% for basic-rate taxpayers, 40% for higher-rate taxpayers and 45% for those in the top earnings band.

Investment firm Fidelity Worldwide is warning, however, that anyone who takes a large sum out of their pensions risks pushing themselves into a higher tax bracket.

Most ‘not aware of tax implications’

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A Fidelity study has found that only a third of people who were considering taking much or all of their pensions as cash were aware of the tax implications.

Alan Higham, the firm’s head of retirement insight, says: "Our research showed that more than half of the over-60s are planning to take their full pension pot at retirement or are still undecided on what they will do.

"However, only a third had an understanding of the possible tax implications of taking more than their tax free lump sum."

Higham explains that someone who's earning £27,000 during the financial year they retire would push themselves into the 40% tax bracket if they took the whole of a £30,000 pension upon retirement.

Paying £1,500 too much

jar with lots of coins

"As a result they would pay over £6,000 in tax whereas by withdrawing their fund over two years, they could save £1,500 of unnecessary tax," he says.

"We urge people approaching retirement to do their homework before they make any decisions.

"And for the pensions industry and government to do more to make people aware of the implications of these at-retirement choices.

"Providers should be applying a safety net check by getting people to explicitly confirm that they know that any money they take above their 25% tax free lump sum will be added to their income and taxed."

Why take money out of a pension?

Retirees are no longer be effectively forced to buy an annuity, which guarantees an income for life but which is a contract that generally cannot be reversed.

It will be easier to leave a pension fund invested in the stock market and other assets and to take a regular income from it – a process known as drawdown.

A number of studies, however, have found that many of those coming up to retirement are concerned about their money running out – an issue that an annuity can address.


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