If you’ve recently discovered that you have one or two forgotten pension pots (or possibly more), that have built up over the years — you might be wondering what’s the best course of action for them now and want to know whether cashing them in at the same time could be a viable option.
Please note, in this article, when we refer to ‘cashing in’ we are referring to all the options customers have when taking their pension pot(s), such as drawdowns and annuity, not just lump sums.
When can I cash in my pension?
As an owner of multiple pension pots, you’ll have a few options, and the first port of call is to get your paperwork ducks in a row. Having a clear list of all your current and past pensions and ensuring that your personal details are up to date with the provider(s) – including any beneficiaries that you’d like to nominate – could make life a lot easier going forward. We’ll explain how to do this further in the article.
But paperwork aside, once you’re ready to make decisions about cashing in your pension(s), here are some key pointers:
- For defined contribution schemes, the first 25% withdrawn from each individual pension pot is tax-free, regardless of how many pots you have. However, the total amount that can be withdrawn tax-free is capped at £268,275. [1]
- Some individuals may be entitled to a tax-free cash amount higher than 25%. However, Wealthify cannot accept pension pots with this protected benefit, as it would be lost upon transfer to us.
- The remaining 75% of the pot’s value is treated as taxable income as the withdrawals happen. But National Insurance doesn’t apply; additionally, once you start withdrawing from your pension, the Money Purchase Annual Allowance (MPAA) limits tax-relievable contributions to £10,000 per year (down from £60,000), but this limit does not apply to withdrawals from small pots or to trivial commutation, as both require taking the full amount.
There’s no limit on lump sums taken from different workplace pensions with this small value (under £10,000). But if you have personal pension pots then you can usually only have three lump sum withdrawals from different small personal pension pots of up to £10,000. This may be a reason to consider consolidating your pension pots to hold them together. But please note that tax treatments depend on your individual circumstances and may change in the future.
Trivial commutation
For workplace and personal pension pots (such as SIPPs and defined contribution pensions), if the combined balance is £30,000 or less, there’s the option to take everything you have in any defined contribution or defined benefit pension as a ‘trivial commutation’. This is a lump sum and 25% will be tax-free.
The rules about withdrawing from multiple pension schemes are complex, but you can read about them in more detail on the Gov.uk website.
How much do I need in my pension pot?
There’s no straightforward answer for this one, although it’s good that you’re future planning and preparing for retirement. A good pension pot is one that can provide you with enough money during your retirement, but that exact amount looks different from one individual to the next.
Some factors to consider are:
- What your housing costs/essential outgoings will be.
- Whether you’d like to have a desired income in addition to those essentials.
- Inflation.
- How you plan to withdraw your money.
- Calculating how much tax you’ll pay on withdrawal.
- Whether you have any other sources of income.
How do you calculate your pension pot?
We have a handy pensions calculator to help with this. Enter your age now, and the age you expect to retire, along with the option to combine the totals of your pension pots, and enter any details of whether you plan to top up additional monthly contributions or add lump sums. The results will instantly show you what a Wealthify Personal Pension Plan could offer you and give you a projection for your retirement sum.
You can also see how making small changes to your retirement age, contributions, or pension transfers can impact your ability to reach your target goal.
Remember, you can start withdrawing from your workplace and personal pension pots at age 55, which will increase to 57 in 2028. However, if your projections don’t meet your expectations by then, you still have several options to increase your pension pot before retirement. You can also have a copy sent to your email to help you take action.
While you’re doing this, you’ll see your separate pension pot values totalled together, and it may make you want to consider whether consolidating them into one place is a worthwhile option. However, not every pension is eligible for a transfer – and you should always seek independent financial advice if you’re unsure it’s the right option for you.
With all of your pension pots in one place, it could be easier to manage and potentially save you money by not paying multiple management fees. At Wealthify for example, we offer a simple annual fee structure for our Personal Pensions; 0.6% up to £100,000, and 0.3% for the portion of the balance £100,000 or above. All charged on a monthly basis.
It could be worth tracking down your old pension pots and transferring them into one pot, if that’s something you’d want to consider. However, it's important to do your research and consider all your options before making any decisions.
How to find old pension pots
Pension tracing is easier than ever, and while many companies offer to do this for you, there is a completely free route from the government: www.gov.uk/find-pension-contact-details
Use the link above to source your past employer’s pension schemes. Once you have the list at hand, you can get to work by contacting the schemes to update your personal details (if those have changed) and getting an accurate amount of the pot’s current value.
Then the choice is yours whether to keep it with that provider, or transfer your pension to a different one. This is straightforward as long as you’ve considered the pros and cons. If you have any pension pots that can be transferred to another, or new pension scheme pot, the process can be pretty simple; we’ve written a guide about it here: Pension consolidation guide.
What happens to my pension pot if I die?
Naturally, this isn’t a sunny topic, but it is a sensible one to plan ahead for. It’s your hard-earned and long-saved money that’s sat in your pension pots, after all.
Typically, your pension scheme(s) should allow the option to nominate beneficiaries for your pension to go to; you may have immediate preference for whether that’s family members, close friends, or even to a charity. So, when you’re contacting your pension scheme providers, updating this information is key if this topic is playing on your mind.
If you have a defined benefit pension (often seen with public service roles, but always confirm on your paperwork or with the provider), your beneficiaries can typically be:
- Your legal spouse/civil partner.
- A partner you weren’t married to/in a civil partnership with but who was financially dependent on you at the time of your death.
- Your children, however, this is restricted to those under 23 and in full-time education. Or, your child who has a mental or physical impairment, regardless of their age.[2]
If you have a defined contribution pension (as you’ll often see as the standard workplace pension scheme, where you and your employer, or sometimes just your employer, tops up a pension pot for your future retirement), you’d likely have more flexibility with nominating the beneficiaries for these.
You may want to also write this into your will, specifically, to avoid future disputes. However, pensions are not legally part of an individual’s estate, so any mention of them in your will is not legally binding.
In addition to your will, you may also want to write a ‘letter of wishes.’ While this document is also not legally binding, it provides an opportunity to list your reasons for certain people included/excluded in your will. The pension provider will also have an ‘expression of wishes’ form, and while it’s up to the provider’s administration to make the decision on who it is paid to after your death, that form allows them to have a clear view of who you’d like to receive your pension.
Charities tend to offer a free will writing service on the condition that you pay a small percentage of your estate to the charity after your death. But it’s worth working out the percentage value of your estate versus the upfront cost of paying for a will. Please note that we cannot provide financial advice, and we recommend seeking the appropriate help and support or consulting with a financial advisor if needed.
How do I cash in my pension?
Lump sums: You can indeed cash in lump sums from your pension pots, with 25% of it being tax-free, subject to the lump sum allowance, the remaining 75% being taxable. It doesn’t need to be the full amount, but it’s worth keeping the £10,000 small pot rule and £30,000 trivial commutation rules in mind, respectively.
Drawdown: This means you can take a smaller amount of money paid to you on an ad hoc or regular basis, while leaving some in your pension pot. Your pension could eventually run out with this. For more information, please read our article ‘What are the rules for pension drawdown?’.
Annuity: Once you’re 55 (57 from 2028), you can use some or all (if it’s right for you) of your pension balance to buy a pension annuity product. This provides you with a guaranteed income for the future, which won’t run out like a drawdown might. You also have the option to buy a short-term annuity for a specific term, ensuring you receive income for that duration.
When you’re ready to start cashing in, simply contact the pension provider to instruct them with the option that you’ve decided on (speak to them directly about how to establish your annuity products you may want to get).
Personal Pensions from Wealthify
If you’re interested in transferring your past pensions into one convenient pot, Wealthify’s Personal Pension could be an option for you.
We offer competitively low fees, zero transfer charges (although check with your current provider in case they charge for ‘transferring out’), an investment style that’s tailored to you and your comfort level, and a team of investing experts managing your portfolio. Click on the banner below to get started.
With Investing, your capital is at risk. Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
References:
[1] https://www.gov.uk/tax-on-pension/higher-tax-on-unauthorised-payments
[2] https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-problems/pensions-after-death
