Yes, usually from age 55, you can take your whole pension pot and use it however you want. However, there could be large tax implications and therefore it may be more tax efficient to take the money in stages, leaving the rest invested. In addition, if you:
- ‘recycle’ any of your withdrawals back into another pension, you could incur a 40% charge.
- take a lump sum, this may reduce the amount you can pay into a pension scheme (annual allowance) in a tax year and still receive tax relief. For the current tax year this would be reduced to £10,000 (this is known as the money purchase annual allowance).
You’ll typically receive 25% tax free and the remaining 75% will be taxed at your highest income tax rate.
Let’s say your only income this tax year is your £30,000 pension pot and you have the standard personal tax allowance. After you’ve taken £7,500 as tax-free cash, £12,570 from the balance of your pot (£22,500) wouldn’t be taxed. This leaves £9,930 left to be taxed at your normal 20% rate – so you’d pay £1,986 in tax.
If you were earning any other income, any taxable money would be added to your other income for that year and taxed at your relevant income tax band. This could take you into a higher tax band of 40%. For example, if you earn £27,000 a year (20% income tax rate) and you then receive £30,000 taxable amount from your pension pot. This would make your total income for the year £57,000 and would push a proportion of your income into the higher tax bracket of 40%.