Pensions are complicated, especially when you get to the part where you withdraw the money.
So here are the options and what they mean…
Taking it all out at once
When you reach the age of 55, if you wish it’s possible to withdraw your entire pension pot as cash.
If you choose this option, you’ll be taxed on it (or part of). The first 25% are tax-free, but the other 75% is added to your regular income and will be taxed accordingly.
It’s important to remember that if this is what you choose to do, you won’t be provided with a regular retirement income, and so it’s advisable to seek professional advice before you make any movements.
If you choose this option, you can’t put it back in at a later date if you change your mind. The deal is done.
If your pension pot exceeds the lifetime allowance (currently £1,030,000) there may be extra tax charges or restrictions that apply. There may also be extra tax charges or restrictions if your 75 years old and have less lifetime allowance available than the value of the pension savings you are looking to cash in.
Taking smaller chunks out
You can take any amount out of your pension, whenever you need it. Depending on your pension, you may be limited to how many withdrawals you’re able to make a year, and there may also be administration charges for each.
Every time you withdraw money from your pension pot, typically, the first 25% will be tax-free, the rest will be taxed with your other income
What to bear in mind…
When you die (to be blunt) any remaining money or investment that came from your pension pot counts for Inheritance Tax. But any part of the pension pot not used, typically wouldn’t be taxed through Inheritance Tax.
Taking money out of your pension pot may reduce your entitlement to benefits in the future.