Taking your whole pension pot in one go

If you have a defined contribution pension, you’ll have built up a pot of money which, from the age of 55, you can use to withdraw from as you want. This includes the option of taking the whole amount as a single lump sum.  

When you take your entire pension pot as a lump sum – usually, the first 25% will be tax-free. The remaining 75% will be taxed as earnings.

If you’re thinking of doing this, it’s important to contact Pension Wise first.

Taking a lump sum won’t give you a regular income. So it’s worth considering what other income or savings you and any dependants will have to live on in retirement.

When money is taken out of the pension pot, any growth in its value is taxable, whereas it will grow tax-free within the pension pot.

You might want to take your entire pension pot in one go for any number of reasons. For example, to clear debts, pay for a holiday, or splash out on a big purchase.

But be aware that it will reduce the money you’ll have to live on when you retire. And you could end up with a big tax bill.

So it’s a good idea to work out the tax you’ll pay beforehand, so you don’t get a shock.

This pension pot calculator will not calculate tax accurately for individuals living in Scotland as income tax calculations are different. Get an estimate at GOV.UK of how much tax you’ll pay (Opens in a new window)

For many people, it will be more tax efficient to consider one or more of the other options for taking your pension.

Taking your pension pot in one go means there will be nothing in that pension that could be used to provide an income to your dependants when you die.

If you die and you haven’t spent all the money you took out, any money remaining will count as part of your estate for Inheritance Tax purposes.

It’s worth being aware that taking a large lump sum from your pension could reduce any entitlement you have to state benefits now, or in the future.

This is because some state benefits are based on the income you have coming in, and the amount of savings you have.

Taking money from your pension may affect your eligibility for means-tested state benefits. 

A company or person that you owe money to cannot normally make a claim against your pensions if you've not started taking money from them yet. This also applies to County Court Judgements and Individual Voluntary Arrangements. Once you have withdrawn money from your pension, however, you may be expected to pay.

If you need to clear debts, it’s important to get specialist help before accessing your pension.

Check with your current scheme administrator or provider if they offer this option. If they do, they’ll explain the process and provide you any paperwork you need.

Not all pension providers offer the option to take your pension pot in one go.

So you might need to move your pot to a new provider and move into pension drawdown to do this.

Our investment pathways comparison tool could help you find a provider that offers this.   

There might be some circumstances where you may not be able to use this option. For example:

• if you’ve received a share of an ex-spouse or ex-civil partner’s pension as a result of a divorce, or
• if you have certain special features or guaranteed rights, such as a S32 Policy which contains Guaranteed Minimum Pension.

It’s important to check with your provider.

When taking a lump sum, 25% is usually tax-free. The other 75% is taxed as earnings.

Depending on how much your pension pot is, when it’s added to your other income it might push you into a higher tax band.

Your pension provider will deduct the tax. This is usually on an emergency tax basis before they pay you the money.

This means you might pay too much Income Tax and have to claim the money back. Or you might owe more tax if you have other sources of income.

The lifetime allowance (introduced in 2006) will be abolished from 6 April 2024. This was previously £1,073,100. 

In preparation for the change in 2024, for tax year 2023/24, a Benefit Crystallisation event (BCE) will still occur, but will be reduced to 0%.

Any remaining money that came from your pension pot will count as part of your estate for Inheritance Tax purposes.

Whereas any money that remains in your pension pot wouldn’t usually be liable for this tax. And if you die before age 75, it will pass tax-free to your beneficiaries.

There are rules that allow you to cash in a small pension pot of £10,000 or less, if:

•  you’ve reached age 55
• the payment covers all your rights in the scheme.

You can use this rule three times for personal pensions.

The limit on workplace pensions is different, so you’ll need to check with the scheme provider.

There are various reasons why taking your whole pension pot under these rules can be beneficial:

• Small pot lump sum payments can be made regardless of the value of your total pension savings – even if they exceed the Lifetime Allowance.
• Small pot lump sums might be available from providers that don’t otherwise allow you to take your whole pension pot.
• A quarter of the payment is tax-free. Tax will be taken from the balance of your payment at the basic rate, and so you might not need to reclaim any.
• Taking a pension as a small pot lump sum doesn’t trigger the Money Purchase Annual Allowance. So you can continue to contribute up to the full annual allowance, and benefit from tax relief on your savings. 

You may be able to take all your benefits under a defined benefit scheme as a one-off lump sum. This is sometimes called ‘trivial commutation’ or taking a ‘trivial lump sum’.

You might be able to take the whole of your pension as a one-off lump sum if:

• you’re at least at least 55 or retiring earlier because of ill-health
• the value of all your personal and workplace pensions (ignoring the State Pension) do not exceed £30,000
• the lump sum must cancel all your pension rights under that scheme
• the pension scheme’s rules allow trivial commutation
• no previous trivial lump sum can have been paid more than 12 months ago – trivial payments made before 6 April 2006 can be ignored
• you have some Lifetime Allowance available when the lump sum is paid.

Your pensions will be valued in different ways depending on the type of pension and whether the pension is in payment or not.

For example, the annual annuity income or defined benefit income you were receiving at, 5 April 2006 was £1,000 a year, the value would be £25,000.

For example, if on 1 January 2021 you put a defined benefit pension into payment with:

• an annual income before tax is deducted of £1,200, and
• a tax-free lump sum of £3,000
• the value for trivial lump sum purposes = £27,000 (£1,200 x 20 + £3,000)

Taking your pension pot in one go could land you with a big tax bill.

For most people it will be more tax efficient to use one of the other options. 

Because of the risk of running out of money, it’s important to think really carefully before taking your whole pension pot in one go.

It’s important to get guidance or regulated financial advice before you commit, such as Pension Wise.

Pension Wise is a free government service that offers free, impartial guidance. It helps you understand what you can do with your pension pot money.

Beware of pension scammers contacting you unexpectedly about an investment or business opportunity that you haven’t spoken to anyone about before.

You could lose all your money and face tax of up to 55% and extra fees.