One of the biggest questions facing people who are approaching retirement is whether to cash in pensions from old employers. In such cases it pays to be fully aware of the available choices and their implications, and this article addresses those and the benefits of taking pension advice.
Any money you have saved into a company pension scheme is yours whether you still work there or not. But although that means you are entitled to withdraw money, there are rules about when and how you can do this that you need to consider when assessing your pension options.
When can I cash in my pension?
The earliest age at which you can cash in a pension from an old employer depends on the type of pension. If it is a defined contribution scheme, you are eligible to take money out from the age of 55. This will rise in 2028 to 57, because it is calculated at 10 years below the state retirement age, which will increase from 65 to 67 in eight years’ time.
You can’t just cash in your pension when you leave your job in most circumstances. And if anyone tells you that you can cash in your pension with an old employer before you are 55, it is likely to be a scam, because there are hefty tax penalties for making an early pension withdrawal if you are younger than that.
You can usually only take money from a pension before 55 without being hit by steep tax charges if you have to stop working because of ill health.
Can I cash in my final salary pension with an old employer?
Final salary or defined benefit pensions provide a guaranteed income in retirement, which is usually based on how much you earned and the number of years for which you were a member of the scheme for.
You will start receiving an income from your pension only at your scheme’s ‘normal retirement age’. In most cases this will be set at above 55, and is typically 60 or 65. If you want to access your pension earlier than this there may be a penalty that will reduce how much you receive.
However, if the total value of all your pension benefits is less than £30,000, you may be able to take them as a one-off lump sum via what is known as ‘trivial commutation’. You will only be able to do this if your pension scheme allows it and you are aged at least 55.
If the value of your pensions exceeds £30,000, you will only be able to cash in your savings in a final salary scheme if you transfer them to a defined contribution scheme. This may mean you will lose the valuable guarantees offered, which is one reason that, by law, you must get impartial pension advice from a professional before transferring.
Can I cash in my whole pension?
If you’re aged 55 or over, and your defined contribution scheme from your old employer allows it, you may be able to do this if you so wish. Not all company schemes will offer this option, though, in which case you may need to transfer your savings to a different type of pension.
If you plan to cash in your whole pension, remember that only the first 25pc will be tax-free and you must pay income tax on the remaining 75pc. If you have built up a big pension with an old employer this could mean you end up with a steep tax bill.
And if you do take out all your retirement savings at once, you will need to think carefully about how to ensure this money will meet all your living expenses in future. Having your savings available in cash means there is a risk you will spend it too quickly and run out of money in retirement.
Bear in mind too that cashing in your pension could reduce your entitlement to benefits now or as you get older, so make sure you fully understand the financial impact of taking money out.
How many pension pots can I cash in?
This is a very pertinent question now that research shows people are, on average, likely to have more than 10 jobs during their careers. If you have worked for a number of different employers, you can cash in an unlimited number of small pension pots of up to £10,000 each from occupational schemes provided each scheme’s rules permit it. You must be aged at least 55 to do this.
Can I cash in a pension I’m already receiving?
This depends on how you have chosen to take your pension. For example, if you have used your defined contribution pension from your old employer to buy an annuity, or guaranteed income for life, it may still be possible to sell this for a cash lump sum.
Before you consider this, it is important to weigh up the pension costs. You could be offered a much smaller sum than you were hoping for, and there will usually be charges for selling your annuity, so it may not make financial sense to do this.
An increasingly popular way to access pension savings is via flexi-access pension drawdown, where your money remains invested and you take as much or as little income as and when you need. Again you should be careful about tax implications and running out of money too soon.
Remember your pension allowances
If you cash in a pension with an old employer, it could adversely affect how much you can pay into schemes. An annual allowance, capped at £40,000, is applied to the sum that you can pay into a defined contribution scheme and receive tax relief.
In the scenario you begin to flexibly access your pension, something called the Money Purchase Annual Allowance (MPAA) may apply. The MPPA means that only £4,000 can be contributed to a pension, this limit applies across all the pensions you hold.
In summary, cashing in a pension from an old employer can have serious financial repercussions, so if you are not sure whether it is the right choice for you, or if you want to discuss other options that may be available to you, seek professional financial advice.
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A one-off fee of 1.95% is only payable to Profile Pensions if you decide to accept the pension investment recommendation and transfer your pension(s).
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Information correct at date of publication.
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