Taking the whole pot as cash - tax implications

You can exchange your entire defined contribution (DC) pension fund (including a DC AVC fund) for a single lump sum. However, this may have tax implications that you may not have considered.

Example 1

A 65 year old member has a pension fund of £35,000 and wishes to take their whole fund as cash. The member has no other income other than their state pension. The first 25% is paid tax-free, the table below shows how the remainder would be taxed.

In this circumstance, the member pays £4,668.76 in tax and receives only £30,331.24 in cash from their total fund of £35,000. Every member is able to receive an income of up to £11,000 each year, which is not taxable. This means (assuming no changes to the personal allowance or tax thresholds) that if the same member takes nine payments of £2,906.20 and one payment of £94.20 over ten years (in addition to their 25% tax free cash) that they would not have any tax to pay. This is because the state pension of £8,093.80 plus a cash payment of £2,906.20 from their fund would be equal to the Personal Allowance.

Example 2 – Larger Pension Funds
If the total taxable income after deduction of the Personal Allowance is larger than £33,000, then any income over this is taxed at 40%. If the same member shown in the example above had a total fund of £70,000, due to being taxed at the higher rate of 40%, they would pay £13,237.52 in tax and receive only £56,762.48 in cash from their total fund of £70,000. Before drawing your pension fund as cash, your own circumstances should be considered and guidance should be sought.
Example 2 – Larger Pension Funds

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