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Preparing for your retirement is an exciting time in your life. But what if you find yourself in a financial bind before you reach your golden years? Perhaps you have debt to pay off or unexpected expenses to cover? You might be wondering: “Can I cash in my pension early?”
There are multiple ways you can cash in your pension early. These options include taking an early retirement, taking a lump sum, taking a partial lump sum and pension release. Each comes with their own set of benefits and risks, so it’s important you take the time to consider which option is best for you before making a decision.
In this article, we explore these various options available to you in detail, outlining the potential advantages and disadvantages of cashing in your pension early.
What is a pension and when can you access it?
Before you explore your options, it’s important to gain a basic understanding of what a pension is first. A pension is a retirement savings plan, designed to provide you with income after you stop working. Most people contribute to a pension plan through their employer, although those who are self-employed can also set up a personal pension.
When you retire, you can access your pension in the form of regular payments (an annuity) or as a lump sum (pension drawdown). The age at which you can choose to access your workplace pension depends on the specific plan you have, but it’s typically between 55 to 65 years old. The state pension age is currently 66 for men and women in the UK (set to increase from to 67 from 2026).
When it comes to cashing in your pension early, there are a few options available to you which we look at in detail below. As with any big decision about your pension, we recommend speaking to a pension advisor first ,who can provide guidance tailored to your individual circumstances.
Taking an Early Retirement
The first option is to take an early retirement. If you’re at least 55 years old, you can choose to retire and start receiving your pension payments early (on 6 April 2028, the minimum pension age is rising from 55 to 57). This can be an appealing option if you don’t like your job, if you’re wanting a change in lifestyle or you think it would be beneficial to your health. There are plenty of legitimate reasons for taking an early retirement.
But, whatever your reasons might be, you need to be aware of what this entails. Firstly, you’ll receive a smaller pension than if you worked until the usual age of retirement. The earlier you retire, the fewer years you have to save into a pension, and the smaller your pension pot will be. This amount will have to last you longer, so if you withdraw most of your pension early on in your retirement, you could be at risk of a pension shortfall.
Pension tax is another important aspect to consider, as you’ll have to pay income tax on each withdrawal if you choose to access your pension via drawdown, for example. Depending on the size and frequency of your withdrawals, drawdown tax could significantly impact the size of your pension pot.
Taking an early retirement requires thorough planning and preparation. It may be the case that a gradual retirement is a suitable compromise, where you reduce your working hours but continue paying into your pension for longer.
Taking a Lump Sum
Another option is to take out a lump sum from your pension. This means you’ll receive a one-off payment, as opposed to regular pension payments. The amount you can receive as a lump sum will depend on your specific pension plan, but it’s typically a percentage of your total pension pot.
While this is a tempting option, especially if you need a large amount of cash quickly, there are several factors to consider. Firstly, the amount you can receive as a lump sum will depend on your specific pension plan. Generally, you can take up to 25% of your pension pot tax free as a lump sum. You’ll then have 6 months to start taking the remaining 75%, which you’ll usually pay tax on.
Secondly, taking a lump sum means that you’ll have less money in your pension pot to provide income in your later years. You won’t have a regular retirement income for you or for any dependents after you die, so you’ll need to plan how much money you can afford to take with this option. This can be a significant concern, especially if you have a relatively small pension pot. If you take a large lump sum early on, you could end up with very little left to provide a regular income when you retire.
Taking a lump sum can also affect your eligibility for means-tested benefits. If you receive a lump sum that takes you over the savings threshold for benefits such as Housing Benefit, you may find that your benefits are reduced or even stopped. It’s important to consider how this decision will impact your overall financial situation.
It’s worth noting that some pension plans may offer alternative lump sum options, such as phased drawdown. This involves taking smaller lump sums over a period of time, rather than one large lump sum.
This can be a more flexible approach that allows you to access your pension savings as and when you need them, without taking a big hit on your overall pension pot. It’s worth getting professional pension advice to explore your options and determine the most suitable course of action for your individual circumstances.
Taking a Partial Lump Sum and Reduced Pension
A third option is to take a partial lump sum and a reduced pension. This means that you’ll receive a smaller lump sum than the previous option, but you’ll also receive regular pension payments. This can be a good compromise if you need cash quickly, but you don’t want to completely drain your pension pot. You can leave the remaining fund invested until you need it.
Taking a partial lump sum means you can still benefit from the security of a guaranteed income in your later years. This can provide peace of mind, helping to ensure that you have a regular income to cover your living expenses
However, it’s important to keep in mind that taking a partial lump sum will still result in a reduction in your pension payments, so you’ll need to be aware of the long-term implications of this decision. The reduction will depend on the size of the lump sum you take and the rules of your pension plan.
Pension Release
Pension release, also known as pension unlocking, involves transferring your pension pot to a specialist provider who will pay you a lump sum in exchange for the rights to your future pension payments. This option is only for extreme cases, such as serious illness.
We recommend exercising caution with this approach, as pension release can be very expensive. Providers will charge fees and interest on the lump sum you receive, which can significantly reduce the amount you gain. In addition, taking a lump sum in this way may also result in significant tax bills, as the money received is taxed as income.
Pension release also means that you’ll lose the security of a guaranteed income in your later years. You could end up with less money overall, as you’re effectively selling off the rights to your future pension payments. If you exhaust the lump sum you receive, you may be left with no income in your later years, which is a huge risk in itself.
Key takeaways for cashing in your pension early
As shown above, there are a few different options available if you decide to cash in your pensions early. Each option has its own advantages and risks, so you’ll need to carefully weigh these up against your individual circumstances and financial goals before reaching a decision. The best way to do that is to get help from a professional pension advisor. While it can be tempting to access your pension savings early, it isn’t for everyone.
At Almond Financial, we can help you to understand your pension options and provide guidance on the best course of action to meet your individual needs. With careful planning and expert advice, you’ll be able to make informed decisions about your pension and ensure that you’re able to enjoy a financially secure retirement. Book a free initial call with one of our advisors to learn more.
FAQs
When is the earliest I can access my pension?
The earliest you can access your pension is usually at the minimum age of 55 (which is rising from 55 to 57 on 6th April 2028), but there are some rare cases in which you can access it earlier than that. Some plans may allow you to access your pension before 55 if you have health problems or other extenuating circumstances. It’s important to check with your pension provider or financial advisor to determine when you can access your pension.
Can I take my pension as a lump sum?
It is possible to take your pension as a lump sum, but this option is not available to everyone. If you have a defined benefit pension plan, you may not be able to take your pension as a lump sum. If you have a defined contribution pension plan, you may be able to take your pension as a lump sum, but this will depend on the rules of your plan. If you do take your pension as a lump sum, you may be subject to significant tax penalties, so it’s important to speak with a financial advisor to determine the best course of action.
How long does it take to cash in a pension?
The amount of time it takes to cash in a pension can vary depending on the type of pension plan you have and the provider you are working with. In some cases, it can take several weeks or even months to cash in a pension. Check with your pension provider, or pension advisor, to find out about specific processing times and any requirements you need to meet before cashing in your pension.
Do I need a financial advisor to cash in my pension?
You’re not legally required to consult with a financial advisor before cashing in your pension. However, it’s highly recommended. They can provide valuable insights into the implications of accessing your pension early, tax consequences and how this decision fits into your broader financial plan. Given the complexity of pension decisions, gaining expert advice can be crucial for ensuring you make a decision that’s in your best long-term interest.
Can I still work after cashing in my pension?
Yes, you can continue to work after cashing your pension. This is becoming a more popular option as not everyone wishes to stop work completely and all at once.
You may want to gradually ease yourself into retirement, by going down to part time hours. Or, perhaps you’d like to retire and start your own business. There are lots of options available for those looking to carry on working after cashing in some of their pension.
However, since pension income is treated the same as any other kind of income, there are tax implications that are important to consider here. Speak to a pension advisor to find out the best way to take your pension while continuing to work.
Pensions and Investment Risk Warning: The value of pensions and investments can fall as well as rise. You may get back less than you invested.
