Good news about tax-free cash and your pension

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MoneyPlus Features Team

20th December 2017 at 1:26pm

The good news about taking tax-free cash from your pension

How and when you can take your 25% tax-free cash is one thing people tell us they want to know more about when they’re thinking about taking money from their pension savings.

Whether taking your pension is on your list for 2018, or you just want to know more, here are a few things we’d encourage you to think about so you can get prepared.

After all, how you manage what could be a large sum of money could make a big difference to how you live your life.

A quarter of your pension is tax free

Research we carried out this year shows that just over a third of our customers know how tax free cash works.

The reality is you can normally take a quarter of your pension savings tax free, with the rest taxed as income when you take it any time from the age of 55.

Explore your options and look at ways to make the most of your money in retirement.

“There are definitely some myths around tax-free cash that we’d like to bust,” explains David Downie, our technical pension expert here at Standard Life.

Take it right away – or wait and take it later?

It’s a great thing to think about getting a decent sum of money, free of tax to spend as you like.

It could be tempting to see it as a windfall and take it all as soon as you’re able to. But you don’t have to take any or all of it.

You can leave it as long as you want invested in your pension with the potential to keep growing.

Of course, your pension can go down as well as up, and you could get back less than you paid in.

“There’s one really important thing you need to consider,” continues David, “and that’s if you spend a quarter of your pension fund at once, how sure are you that you’ll have enough left to last you through retirement?”

Of course, even if you don’t take your tax free cash, you still need to take care not to run out of money.

When you’re ready: Do you have the flexibility you need?

Before pension freedoms arrived in 2015, taking all your tax-free cash then buying an annuity was what most people did. Things have changed a lot since then.

More people now take a flexible income when and how they want through pension drawdown.

This lets you take your 25% tax-free cash when you need it – normally from age 55 – and take the rest of your pension as taxable income.

Not all pension providers let you take your money in a flexible way.

With us, you can usually take it all first, or in full or in phases, however you want – some other providers aren’t able to offer this.

Why is this such a good thing?

It means you control how much of your pension income is tax free and how much is taxable.

It can make a difference to how much tax you might pay in the long term. That’s because most people pay less tax in retirement than they do while working.

A bit of planning to make the most of your allowances and tax bands could mean you keep more of your savings.

Take it while you’re still working

You can take tax-free money from your pension and keep saving while you’re still working, as long as you’re in a modern, flexible pension.

After all, if you’re in a workplace pension that lets you do this, you probably wouldn’t want to give up any employer contributions and that all-important tax-relief on what you pay in.

But take some of your taxable income and how much you can keep saving tax-efficiently was recently cut to £4,000 each year.

We explain more about this and what it could mean for you in our Real-life Q&A: ‘Can I take tax-free cash from my pension and keep paying in?’

Busting the age myth: There’s no age limit

Once you’re over 55 you can take tax free cash at any age. But after age 75, if you die without taking it, what may have been tax free may not be when in your beneficiary’s hands.

However, if you take it and don’t spend it, you could pay 40% IHT on it. This might be more than the income tax your beneficiary may need to pay if you left it in the pension.

Think about the inheritance tax angle

It’s certainly worth thinking about how you manage your tax-free cash when it comes to passing your wealth on.

Money still sitting in your pension is usually protected from inheritance tax. But once you take your tax-free cash out of it, anything you haven’t spent is part of your estate no matter what age you are.

And that could mean a 40% tax charge, reducing what your dependents may receive.

Find out more about inheritance tax on

Where you can you get more guidance on this

We know there’s a lot to think about and how and when to take your tax-free cash very much depends on your circumstances, what you want to do with your money and your plans to make it last.

It’s worth getting advice on this from your adviser. If you don’t have one, you can find one at, or get in touch with our advice arm, 1825. Please note, there is a cost for advice.

If you’re over 50: The Government’s free and impartial PensionWise has more information and guidance, or find out more from our tax in retirement guide.

The Pensions Advisory Service is a good place to find more information too.

Tax and legislation may change and the information here is based on our understanding in December 2017 and shouldn’t be taken as financial advice. Your own circumstances will have an impact on tax. A pension is an investment and you could get back less than you paid in.

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