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Cashing In Your Pension

People can cash in their entire pension pot, or receive ad-hoc payments with 25 per cent of each payment is tax-free, an option known as the ‘uncrystallised fund pension lump sum’.

There are no limits on the amount that can be taken in cash and any money left in the pension pot will pass tax-free to the individual’s beneficiary where the amount is within the lifetime allowance, with death under the age of 75 allowing future withdrawals to be made tax free.

Any money at date of death which has been moved out of the pension, will form part of the individual’s estate and taxed accordingly. Like an annuity, the decision to cash in your pension is irrevocable.

For the UFPLS option, the whole amount crystallised will be paid out in one go and 25 per cent will be tax free.

There are restrictions on who can use these payments, excluding anyone with enhanced or primary protection with a tax-free cash protection attached, or a standalone lifetime allowance enhancement factor.

Many schemes will not offer cashing in options and people may have to transfer to get access to their cash. Others will allow access, but could charge hundreds of pounds for ad hoc lump sums, limit the frequency of withdrawals, or insist on minimum sums left in cash.

In terms of the tax ramifications, cashing in your pension moves the pot out of a ‘tax-protected environment’. Moreover, large withdrawals will be initially taxed at emergency rates, with clients needing to claim the money back later.

For those not already in receipt of an income from their provider an emergency tax code will be used, which will assume the amount paid is a newly recurring monthly instalment and tax it accordingly.

This could see taxes of as much as 45 per cent applied to any amount above £12,500, with 40 per cent likely to kick in on amounts of over £3,500. These amounts could even be lower if the individual is already receiving state pension.

Overpayment may not be able to be reclaimed until the end of the tax year, because if the fund is not extinguished there is no P45 to be used to reclaim the tax mid-year.

The government has said that anyone taking cash, who then subsequently runs out of money in the fund, will be considered to have deliberately drained their fund and could lose their right to state benefits.

Future tax-relievable contributions with this option are also limited to £10,000 a year, rather than £40,000.

We strongly recommend that you do not take this action without taking proper Financial Advice.

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