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In this section

Retirement

Taking
tax-free cash

Up to 25% tax-free cash

When you can take it

From 55 you can usually start to take money from your pension. 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.

You can receive your tax-free cash as one single payment, or in stages – it depends what you decide to do with the rest of your pension.

Please remember, pension and tax rules can change and benefits depend on personal circumstances. If you have a defined benefit (e.g. final salary) pension, the scheme rules will control how much tax-free cash you’ll receive and how you can take it.

How you can take it

If you want to take your tax-free cash, but you don’t need to take an income from your pension just yet, you might consider drawdown. Briefly, this means you’ll receive up to 25% of your pension as a tax-free cash payment and the rest will be kept invested as you choose. You can then make withdrawals (which will be taxed as income) from your investments, when you’re ready.

If you’re considering drawdown, you need to bear in mind that although there’s the potential for investment growth, it isn’t guaranteed. And the value of investments, and any income or dividends they produce, can go down as well as up. So you could get back less than you originally invest. You need to be prepared to monitor and regularly review your investment choices.

If you want to receive tax-free cash and take an income, there are three things you might consider doing.

One is to use your pension to buy an annuity (which provides a guaranteed income for life). You’ll receive up to 25% of your pension as a tax-free cash payment, but the rest will be exchanged for a regular secure income. This is taxable, and can’t normally be changed once set up, but will be paid for the rest of your life. How much income you’ll receive will depend on different factors, like your age, pension value, the rates available at the time and features you choose. Shopping around for the best rate and confirming health and lifestyle details could mean you get more income.

Another option is to move your pension into drawdown. You’ll still receive up to 25% as a tax-free cash payment, and the rest will be kept invested as you choose. You can then make withdrawals (which will be taxed as income) from your investments, when you’re ready.

Or you could take lump sum withdrawals, where 25% of each withdrawal will usually be paid tax free and the rest will be taxed as income. You could even withdraw your whole pension as one lump sum if you want to.

With drawdown and lump sum options you need to be mindful of how long you need your pension to last. Unlike an annuity, your income isn’t guaranteed because investments can fall in value as well as rise, so you may not get back what you originally invested. Taking large withdrawals could also affect your tax situation, so make sure you’ve planned for this before making any decisions.

You don’t have to access your whole pension in one go if you don’t want to. And you can mix and match the ways you take your pension, making it possible to receive your tax-free cash in stages.

For example, if you had a £100,000 pension, you might decide to secure some income first, and use £60,000 to buy an annuity. You’d receive a payment of up to £15,000 tax-free and a guaranteed regular income (which is taxable), paid for life.

You might decide to keep the remaining £40,000 invested, in the hope that the value, and therefore the tax-free cash you’re yet to take, will grow through investment returns. Though there are no guarantees as investments can fall in value as well as rise, so you may not get back what you originally invested.

Later, you might decide to move this money into drawdown and take the rest of your tax-free cash (up to 25% of this portion). You can then make withdrawals from your investments as and when you need to (which will be taxed as income).

What you can do with it

You’re free to spend or save your tax-free cash as you wish. You might decide to use some of it for your day-to-day expenses, to pay off your mortgage, to take an extended trip abroad, or to help your loved ones financially. It’s your money and your choice.

Remember though, inflation reduces the spending power of cash so having a plan is important. As a rule of thumb, you should keep around six months’ worth of expenses in easily accessible cash, in case of emergencies. For any cash you don’t need in the short term, you could consider other options.

Fixed term savings

Fixed term savings can potentially give you a higher rate of interest than standard saving accounts, and peace of mind that both your capital and future returns are guaranteed. But you need to be happy for your money to be tied up for a period.

Active savings

Our new Active Savings service lets you pick and mix from a range of UK banks and building societies’ fixed term savings products, through one simple to use online account.

Active Savings

Stock market investing

For any cash you’re happy to tie up for longer than five years, we’d suggest looking at the stock market, if you’re happy with the level of risk that comes with investing. Over the long term shares tend to outperform cash, although there are no guarantees as all investments can go down as well as up in value, so you could get back less than you invest.

Stocks & Shares ISA

For some investors the first port of call is a Stocks and Shares ISA, which is designed for those looking for long-term investing options and the potential for investment growth. Each tax year (6 April to 5 April) there’s a limited amount of money you can put into an ISA, but any future gains and income are free from UK tax. You can also make withdrawals when you need to. This tax year the ISA allowance is £20,000.

Stocks & Shares ISA

Fund & Share Account

Our flexible Fund and Share Account allows you to buy, sell and hold your investments in one place, with no limits on how much you can invest. It’s also designed for long-term investing, but if you’ve used up your ISA allowance this might be the next best option to consider. You can withdraw money when you like, though income made on investments is taxable.

Fund & Share Account