How does taking a cash payment work?
Cash lump sum video transcript
When you reach age 55, you can choose to take your retirement savings as a cash payment. This could be all in one go, or spread over a series of smaller lump sums.
The first 25 per cent of each cash payment will be paid tax free, while the rest will be taxed as income. Any money you leave behind will stay invested in your plan, so it still has time to grow. If at any time your needs change, you can always take a flexible income, or use the rest of your retirement savings to buy a regular secure income that’ll be paid for the rest of your life. When you die, any savings you have left in your plan can be passed onto your loved ones.
Things to watch out for
With cash lump sums, your money isn’t guaranteed to last forever, so if you don’t manage your income carefully, it could run out before you die. Taking large sums of money out of your plan could push you into a higher rate tax bracket, meaning you’d need to give more of your savings to the tax man. When you leave money in your plan, there’s a risk your investments don’t perform as well as you’d hoped, so you might end up with less than you started with.
To find out more about your retirement options, talk to your financial adviser, or visit www.royallondon.com/retirement.
Get up to speed
If you're planning to take a cash lump sum, there’s lots to think about. Select a question below to see what taking a cash lump sum could mean for you and your retirement savings.
What are my cash payment options?
- Have it all in one go or spread it out to suit you
You can take all your retirement savings in one lump sum – or spread it out over a series of smaller cash payments.
- Enjoy some tax-free cash
Usually, the first quarter of any cash payment will be paid tax-free while the rest will be taxed as income. You may be entitled to a bigger tax-free allowance if you’ve previously secured one with HM Revenue & Customs.
- Give your savings more time to grow
Whatever you leave in your plan will stay invested – meaning it still has the chance to grow.
- Keep your options open
Providing you don’t take all your retirement savings in one go, you can always explore another retirement income option.
What do I need to watch out for?
- Your retirement savings aren’t guaranteed to last forever
If you need your retirement savings to live on, you need to think carefully about how you’ll make your money last. Because once it’s gone, it’s gone for good.
- You could pay more in tax
Taking large sums of money from your retirement savings can push you into a higher tax bracket – meaning you’ll hand over more of your hard-earned savings to the taxman.
- You can’t change your mind
Once you’ve taken a cash payment from your plan, you can’t usually change your mind - even if your circumstances do.
- You could be exposed to investment risk
When you leave money in your plan, there are no guarantees it will grow. Indeed, if your investments perform poorly, you could get back less than you started with.
- Saving into other pension plans could be restricted
When you start taking cash from your plan, the government puts a limit on how much you (and your employer) can save into other money purchase pension arrangements without a tax charge. This is called the money purchase annual allowance – and it’s currently set at £4,000 a year.
- Your entitlement to state benefits could be affected
The amount of cash you take from your retirement savings could affect your entitlement to means-tested state benefits, this includes such things as housing benefits and council tax reductions.
You should also remember that tax rules depend on your individual circumstances and may change in the future.
What happens when I die?
If you have money left in your plan when you die, it can be passed on to your loved ones – usually free from inheritance tax.
- If you die before age 75, your retirement savings can be paid to your loved ones however they like, income tax free.
- If you die aged 75 or older, your retirement savings can be paid to your loved ones however they like, subject to tax.
How does this income option compare?
|Your options||Secure income||Flexible access||Take cash|
|Can provide a regular income?||Yes||Yes||No|
|Is my income guaranteed for the rest of my life?||Yes||No||No|
|Can I change how much money I receive?||No||Yes||Yes|
|Could my money run out later in retirement?||No||Yes||Yes|
|Can I do something different with my savings in later years?||No||Yes||Yes|
|Can I take some tax-free cash?||Usually up to 25% of your pension pot*||Usually up to 25% of your pension pot*||Usually up to 25% of your pension pot*|
|Find out more||Secure income||Flexible access|
Find the support you need
You've got some big decisions ahead - and no doubt you'll have some questions.
The good news is, there's plenty of support available.
Find tailored advice that's right for you
Access free support from the government
Use our retirement planner tool
More about pensions and retirement
How is my pension taxed?
We can’t personalise how much tax you might pay, but we can give you some general information about how tax works.
There are limits on the amount you can invest in pension plans and on the maximum value of retirement savings that you can build up without being subject to a tax charge.
Find the answers to some frequently asked questions about pensions.
Secure income explained
A secure income is a financial product that allows you to convert your retirement savings into a regular, fixed amount of money for the rest of your life. This is also called an 'annuity'.
Investment types explained
Get to know more about deposits, equities, property and other investment types.
The new state pension - your questions answered
When the new state pension was introduced for those reaching pension age from 6th April 2016 it was intended to be much simpler than the system it replaced.
How to make sure the right person gets your pension when you're gone
Read our guide on how to make sure that the right person gets your pensions benefits.