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Can I cash in my pension?

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tocsintocsin Forumite
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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 £18k 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 £100, you'll only actually see £80 taken out of your pay packet for 20% tax payers, and £60 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.
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Replies

  • BrowntoaBrowntoa Forumite, Board Guide
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    as this keeps cropping up as a question was kindly put together by tocsin

    made a "sticky" so it stays on the front page
    Links in my signature currently broken
    I'm the Board Guide of the Referrers ,Telephones, Pensions , Shop Don't drop ,over 50's , Boost your income and Discount Code boards which means I volunteer to help get your forum questions answered and keep the forum runnning smoothly .However, please remember, board guides don't read every post. If you spot an inappropriate or illegal post please report it to [email protected] Any views are mine and not the official line of MoneySavingExpert.
  • bendixbendix Forumite
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    A noble attempt tocsin, but you and i both know this isn't going to stop the never-ending stream of the same question.
  • atushatush Forumite
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    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.
  • BrowntoaBrowntoa Forumite, Board Guide
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    Part of the Furniture 10,000 Posts Name Dropper Photogenic
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    some obvious looking spammy posts removed and the replies after them to tidy thread ;)
    Links in my signature currently broken
    I'm the Board Guide of the Referrers ,Telephones, Pensions , Shop Don't drop ,over 50's , Boost your income and Discount Code boards which means I volunteer to help get your forum questions answered and keep the forum runnning smoothly .However, please remember, board guides don't read every post. If you spot an inappropriate or illegal post please report it to [email protected] Any views are mine and not the official line of MoneySavingExpert.
  • 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?
  • dunstonhdunstonh Forumite
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    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?

    Only by legislation. Currently the legislation says 55 is the minimum age. So, it would require a pretty spectacular increase for it to happen. There is no hint of it happening. The previous increase was in consultation for nearly 5 years before it happened and was unpopular.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Can I cash in my pension?...... if i decide to emigrate?
  • atushatush Forumite
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    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.
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