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Tax Q&As

Are you considering taking all of your pension savings as cash?

These questions and answers will help you understand the tax implications of doing this as well as providing you with some useful information on things like what to do if you have underpaid or overpaid on your tax and where to go for further guidance.

What are the tax implications and risks of taking all of my pension savings as a cash payment?
  • Your entitlement to state benefits may be reduced.
  • Your ability to save for future additional pension benefit may be reduced.
  • No further payments will be made on your death.
  • You may lose certain guarantees which are included in your policy such as a Guaranteed Annuity Rate (GAR) which you may find beneficial where the market annuity rate is lower than the guaranteed rate on your policy – you should check with your provider whether you have one and how it works.
  • If you are taking your pension savings from your policy before your selected retirement date, your pension fund may be reduced by a Market Value Reduction (MVR).
  • You risk running out of money during retirement for potential long term care needs and for any dependants. You may need retirement funds for 20-30 years or more.
  • Taking your pension savings as a cash lump sum is an irreversible decision – you can’t change your mind at a later stage.
  • You may end up paying tax at a higher rate than normal if your pension cash lump sum, when added to your existing income, pushes you into a higher tax bracket.
If I take all of my pension savings as cash how will this be taxed?

If you decide to cash in your pension policy you will receive 25% tax free, and then your pension provider will apply the appropriate level of tax based on HM Revenue & Customs (HMRC) regulations on the remaining 75%. There are different regulations around how your pension provider will initially apply tax, dependent on the size of your pension savings and whether you have received cash from any other pension savings previously.

If you have a Phoenix Life Individual Pension Policy you can use our tax calculator to give you an indication of what you would receive from your policy if you were to take the entire amount as cash.

It is important to understand the amount of tax that will initially be deducted by your pension provider will not necessarily be the final amount of tax that you pay. Other income, that your provider won’t have been aware of, will affect the final amount of tax that you will pay. You could have either underpaid or overpaid on your tax.

How will I know whether I have underpaid or overpaid on my tax?

To understand this you must contact HMRC who will be able to help you. You can click here for their contact details.

Do I need to take any action if I think I have paid too much tax?

No, HMRC will automatically assess the tax applied by your pension provider and shortly after the end of the tax year will contact you to correct any over or under payment.

Can I contact HMRC before the end of the tax year, in order for them to consider my tax position immediately?

Yes, you must complete one of the following relevant forms available from the GOV.UK website or contact them on 0300 200 3300.

  • Form P50Z if you have no other income except state pension.
  • Form P53Z if you have other sources of income.
What should I do if I do not understand the tax implications of taking a cash payment?

We would recommend that you contact Pension Wise, a free and impartial pension guidance service that has been introduced by the government. You can obtain this guidance online, over the telephone or face to face – whatever suits you.

Alternatively you could contact a tax adviser.

What can I do if I wish to reduce my tax charge on a cash payment?
There are a number of options that you could take and we would recommend that you contact Pension Wise, a free and impartial pension guidance service that has been introduced by the government to discuss these. You can obtain this guidance online, over the telephone or face to face – whatever suits you.

Alternatively you could contact a tax adviser.

You will also find some case studies on our website which provide some scenarios related to the tax implications of taking your pension savings as a cash lump sum.

What are the other options available to me in relation to my pension savings?

There are a number of options:

  • A guaranteed regular income for the rest of your life
  • A flexible income where you would take cash from your pension savings as and when you needed and leave the remainder invested.
  • A combination of these options.
  • You do not have to use your pension savings now and can leave them invested, but you can take them whenever you wish in the future.
  • You may be able to transfer your pension savings to another provider to either take your options or keep your savings invested.

We recommend that you shop around to ensure you get the right option for your needs. You may be able to obtain a higher pension income by shopping around. The easiest way to do this is to:

  • Contact Pension Wise, a pension guidance service that has been introduced by the government.
  • Speak to a financial adviser.
  • Use a comparison website.
  • Contact providers directly.

If you would like further information on these options please use our retirement options explained tool.

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