Please note that this page does not apply if you are a member of an occupational pension scheme. An occupational scheme is where an employer has set up the pension for you and they are the trustees of the pension. If you want to find out about the cashing-in options available to members of an occupational pension scheme, please call us.
Most people have the ability to cash in their pensions using pension flexibility rules. In addition to pension flexibility rules, if your savings in a single pension pot are worth less than £10,000 you may also be able to cash in your pension using small pots rules as well.
What are the conditions
- You’ll usually be able to take your whole pension as a lump sum, but you won’t be able to do so if any of the following apply:
- Primary protection with a protected tax-free cash allowance of over £375,000;
- Enhanced protection with a protected tax-free cash allowance of over £375,000;
- A lifetime allowance enhancement factor with a reduced tax-free cash allowance of less than 25% of your pension pot;
- This policy includes a disqualifying pension credit from a divorce;
- You have no unused lifetime allowance
For more details, go to the HM Revenue & Customs (HMRC) website
Taxing your lump sum payment
If you take your whole pension as a lump sum, 25% of the lump sum will be tax-free and the rest will be taxed as income. HMRC require us to take tax at the emergency rate from your payment and pay it to them for you. HMRC will check whether you have paid the correct amount of tax after 5 April, and they’ll contact you if you haven’t. However, if you think you have paid too much tax you can ask them for a tax refund now - you don’t have to wait for the end of the tax year.
To get a refund now, you can call your local HMRC office or visit their website where you’ll be able to download the necessary forms. It helps if you have your National Insurance number if you call.
You should contact HMRC or a tax adviser if you want to discuss your tax position in more detail.
The Lifetime Allowance
This is the amount you can have saved into all registered pension schemes without giving rise to a lifetime allowance charge.
If you're past your 75th birthday
As you’re past your 75th birthday, although you won’t use up any new lifetime allowance, to be able to take the lump sum, the amount of unused lifetime allowance you had immediately before your 75th birthday must be at least as much as the value of this policy. If your remaining unused lifetime allowance at age 75 is less than the value of this policy, please get in touch and we can discuss your options.
If you're under age 75
The Standard Lifetime Allowance (SLA) is currently £1,073,000. If your total pension savings are less than this amount, then you don’t need to be concerned by it.
If your total pension savings are more than the SLA, we’ll have to deduct the charge before we make any payments to you. If you think you may be affected by this, you should contact a financial or tax adviser. More information about this is included in the Lifetime Allowance Declaration form.
If you have registered with HMRC to protect your pension benefits against the Lifetime Allowance you will have an allowance that is different to the SLA. The Lifetime Allowance Declaration form contains further information about what to do if you have one or more of these protections or a Lifetime Allowance enhancement factor. You should make sure that you read this form properly as certain protections could mean that you’re not allowed by HMRC to take your pension as a lump sum.
Changes to your Annual Allowance
If you take this pension pot as a lump sum using pension flexibility, it could affect the amount you’re able to pay into any other pensions you have by reducing your Annual Allowance. The Annual Allowance is the maximum amount of pension savings you can make each tax year without having to pay a tax charge, known as the Annual Allowance Charge.
If you decide to take this option, we’ll send you a confirmation notice that you may need to send on to other providers you have a pension with.
You’ll only need to do this if these other pensions are money purchase pensions that contributions are being paid into, or defined benefit pensions where benefits are increasing. This is because the amount you can pay into money purchase pensions while still receiving tax relief will reduce to £10,000. You’ll have 91 days from the date you receive the notice to contact the other providers.
If you start to contribute into, or build up benefits in, another pension in the future, you’ll also need to contact the new provider within 91 days to send them the confirmation notice. However, you don’t need to do this again if you’ve already contacted your providers about a previous payment made under flexibility rules.
We’ll provide more information about this in our confirmation letter after we’ve made payment, and you can also find out more here.
What are the conditions:
- You must be 55 or over.
- The total value of your pension policy must be no more than £10,000 when it’s paid.
- You take all the benefits from the pension policy.
- You cannot have taken the benefits of more than two other pensions under this rule. This doesn’t apply to any occupational pensions you may also hold.
Taxing your small lump sum payment
If a pension is taken using small lump rules, 25% of the lump sum will be tax-free and the rest will be taxed as income. HMRC require us to take tax at the basic rate from the payment and pay it to them directly. HMRC will check whether you have paid the correct amount of tax after 5 April, and they’ll contact you if you haven’t. However, if you think you have paid too much tax you can ask them for a tax refund now - you don’t have to wait for the end of the tax year.
You should contact HMRC or a tax adviser if you want to discuss your tax position in more detail.
