Have you taken more tax-free cash than you needed?

You can normally access your pension from age 55 (rising to 57 from 2028).

If you have a defined contribution pension (like a Self-Invested Personal Pension), up to 25% can usually be paid to you completely tax free (up to a maximum of £268,275, for most people ), and the rest will be taxed as income.

If you want to take your tax-free cash alongside a taxable income you can:

1. Use drawdown to take up to 25% tax-free cash and leave the rest invested. You can then make taxable withdrawals from your remaining funds.
2. Take your tax-free cash and use what’s left to buy an annuity, which will pay you a taxable income that’s guaranteed for life.
3. Take an Uncrystallised Funds Pension Lump Sum (UFPLS) of which 25% of each withdrawal will normally be tax free and the rest taxable. Once you take a taxable income using drawdown or as an UFPLS the future amount you can pay into money purchase pensions (such as the HL SIPP) will usually be reduced.

You aren’t limited to one of these options. And you can take them at different times.

Bear in mind, if you have a defined benefit (e.g. final salary) pension, the scheme rules will normally set out how much tax-free cash you can receive. You may have the option of taking a tax-free lump sum in exchange for a reduced pension.

This isn’t personal advice. If you’re not sure what’s right for you, please ask for advice. Pension and tax rules can change, and benefits depend on your circumstances. Money in a pension is normally accessible from age 55 (rising to 57 in 2028). Investments and any income they produce can fall as well as rise in value, so you could get back less than you invest.

Scottish tax bands are different and different rates apply. Pension Wise is a free, impartial government service for anyone aged 50 or over, with a UK based personal or workplace pension. Find out more about Pension Wise.

How much cash is too much?

We think that it’s a sensible approach to hold one to three years' worth of expenses as cash once you’re in retirement.

Inflation eats away at your money’s spending power, so if you’re holding any more than you need to in the long term, you’re leaving money exposed to inflation’s effects.

One to three years' worth is already a sizeable amount. But once you’re retired and typically living on a lower income, it’s harder to top up your pot should you need to access it.

We’ve used data from our Savings and Resilience Barometer to show the average household expenditure for people aged 60 and over.

The figures are split into essential expenses, which are goods or services purchased because they meet a basic need (food, shelter, or healthcare), and total expenses, which include essential and non-essential purchases.

These figures are based on people aged 60 and over, but their retirement status is unknown. Figures rounded to nearest 10.

How do I decide the right amount?

One to three years may seem broad, but the amount you should hold in cash differs depending on your circumstances. And especially, where your income is coming from in retirement.

If all your spending is covered by the State Pension, a Defined Benefit (DB) pension scheme or an annuity, you may only need to hold one year of expenses.

If all your income is coming from your investments, then you may want a larger buffer in case of a sudden drop in the market or investment income.

What to do if you’ve taken more than you needed

Don’t worry. Think about what you want to do with your cash and plan.

If you’ll want the money in five years or more, you should consider investing. You’ll have a chance of higher returns than with cash. However, unlike cash, investments can fall as well as rise in value. So, you could get back less than you invest.

If you hold investments in a Stocks and Shares ISA, your money is sheltered from UK income and capital gains tax. But tax rules can change, and benefits depend on individual circumstances.

If you decide you want to keep it as cash, you should also consider what type of cash savings products are right for you and whether you’re getting a good enough interest rate.

Despite generally offering lower returns, you may want to keep some money in instant and easy access products. Otherwise, in an emergency you might not be able to access your money quickly enough.

Fixed terms generally offer a higher interest rate, but they usually don’t let you withdraw money until the term ends. You can fix in terms from a few months to several years. Holding a portfolio of fixed rates means your cash will be getting higher rates. Plus, you can time your fixes so money is returned to you when you expect to need it. Along with guaranteed returns.

Keeping it simple

Setting up your savings like this could be a lot of work, but it doesn’t need to be.

Our Active Savings service helps you take control of your cash, while saving you time.

You can pick and mix from easy access and fixed-term savings products from different banks and building societies, with one online account.

You’ll get better rates and more choice than a typical high street bank, and it’s all in one place.

Moving money between banks and products can be done in minutes.

So, you can get on and enjoy your retirement in the knowledge your money is working hard.