Interactive Investor

How to take cash out of your pension

13th October 2015 12:07

Sam Barrett from interactive investor


Share on

Advisers have reported a number of strategies to deter people from cashing in their plans ranging from hefty fees, exit penalties, and minimum fund values to a requirement to seek independent financial advice first.

What restrictions can you expect?

Restrictions will vary between providers and schemes, but here is an outline of what some of the major players are doing:

Legal & General: Maximum of two withdrawals a year, minimum withdrawal £5,000, and you must leave at least £5,000 invested. Corporate pension – minimum withdrawal of £2,000, one withdrawal is free in any 12-month period with subsequent withdrawals charged at £20.

NEST: No partial withdrawals available.

Phoenix Life: Full withdrawals are available at no additional charge but there are restrictions around partial withdrawals. Customers can take a partial withdrawal if they use the remaining fund to buy an annuity or take financial advice from Just Retirement at an additional cost.

Scottish Widows: £5,000 minimum for partial withdrawals.

Virgin Money: No partial withdrawals available.

Zurich: Full withdrawals are available at no additional charge but there are restrictions on partial withdrawals for customers who are not on the advised Zurich Intermediary Platform. For these customers, the minimum withdrawal is £1,000 and they must leave at least £5,000 in their pension.

Aren’t pension companies breaking the rules?

These restrictions might be frustrating but pension companies are within their rights. The new rules give providers permission to offer access to your cash, they don’t oblige them to and as a result older schemes, as well as providers that are no longer active in the market, are ignoring the flexibility.

There are also situations where pension companies are forced to insist you take advice. Malcolm McLean, senior consultant at Barnett Waddingham, explains: “Taking independent financial advice is a statutory requirement when there are guarantees attached to your pension. This is the case where you have a pension worth at least £30,000 and it either has a guaranteed annuity or is in a final salary scheme..”

Your rights

Other than this statutory requirement, Tom McPhail, head of retirement policy at Hargreaves Lansdown says you are still within your rights to get your hands on your cash. “ It’s legitimate for the pension company to say no but, if this happens, you could consider transferring to a scheme that allows access.”

If you are in an older scheme, you may be able to solve your problems by transferring to a more modern one with the same provider. Fiona Tait, pensions specialist at Royal London, explains: “If you transfer internally it’s likely to be quicker but you may also avoid any additional charges and exit penalties.

Whether you stick with your current provider or move your pension to a new home, allow a month for the transfer to complete.

Beware charges

As well as finding an accessible home for your pension, it’s important to think about the charges you might run into. McLean explains: “Some companies charge as much as £150 for a withdrawal, while with others it won’t cost you a penny. It could be worth transferring if your provider is going to levy these charges.”

Often these fees will depend on how you want to take the money – for example whether you take money out in stages or one go.

Getting your money

Once you’ve found a suitable home for your pension, or your provider wasn’t imposing any draconian penalties in the first place, actually getting the cash out should be straightforward.

First contact your provider and tell them you want your cash. But, even if you’re with a flexible provider you should still expect to get the third degree. Tait explains: “There are risks associated with taking cash out of your pension, so we run through these with our customers to make sure they understand the potential consequences.”

For the benefit of all their customers, they will also need to check that you are the genuine owner of the pension to prevent against fraud.

Once you’ve gone through this, it’s a simple matter of completing the necessary paperwork and waiting for your cash.

Although there were some serious delays immediately after the reforms, many providers are now coping with demand. Royal London has a service standard of five days and LV= says most customers can expect to see their money within six to 10 days.

Don’t forget tax

Before you cash in your plan bear in mind that only the first 25% is paid tax-free. The remainder is taxed at your highest rate and depending on your income over the year may result in you be being bumped into a higher tax bracket.

Also as your pension company won’t have any details of your other income, emergency tax will be applied. This effectively wipes out your personal allowance, treating your cash withdrawal as a monthly payment for tax purposes. “Most people will end up paying more tax than they need to if they withdraw a lump sum,” says Tait. “Although this overpayment should work itself out through your tax code, this can take two to three years and there’s no guarantee you’ll get all your money back.”

To speed up the process, she recommends contacting your tax office and completing the paperwork to get your overpayment refunded. HMRC has a number of forms – P50Z, P53Z and P55 – depending on your circumstances.

Unsure whether to take your cash? Find out about the government's Pension Wise service.

This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Get more news and expert articles direct to your inbox

Sign up for a free research account to get the latest news and discussion, and create your own virtual portfolio.

Free Sign Up