Have you taken more tax-free cash than you needed?
Learn how to manage your excess tax-free cash and, how to calculate how much you’ll need if you access another pension in the future.
Last Updated: 8 August 2024
You can normally access your pension from age 55 (rising to 57 from 2028).
If you have a defined contribution pension (like a Self-Invested Personal Pension), up to 25% can usually be paid to you completely tax free (up to a maximum of £268,275, for most people), and the rest will be taxed as income.
To take your tax-free cash, you'll have to access your pension, which you can do in a variety of ways.
This isn't personal advice. If you're not sure what's right for you, please ask for advice. Pension and tax rules can change, and benefits depend on your circumstances. Pension Wise is a free, impartial government service for anyone aged 50 or over, with a UK based personal or workplace pension. Find out more about Pension Wise.
Managing any excess tax-free cash from a pension
If you've accessed your pension and taken out more tax-free cash than you needed, you might be unsure about your next steps.
While reinvesting the money back into your pension isn't an option due to tax-free cash recycling rules, here are some low-risk ways to manage the excess funds:
High-interest savings accounts
Placing your extra cash in a high-interest savings account can help you earn some interest while keeping your money safe.
More on our Active Savings Account
Fixed-term savings accounts
These accounts typically offer better interest rates compared to easy access savings accounts. By locking your money away for a fixed term, you can usually secure higher returns with minimal risk. Fixed rate products generally only let you access your savings after the term ends.
Premium bonds
Premium bonds are a government-backed investment where your capital is secure. While returns depend on prize draws, they offer a chance to win tax-free prizes.
Cash ISAs
Cash Individual Savings Accounts (ISAs) allow you to earn interest tax-free. They are a secure option for keeping your money accessible while benefiting from tax-free interest.
Money market funds
These funds invest in short-term, low-risk securities, offering potentially higher returns than traditional savings accounts while maintaining a high level of security. All investments and any income they produce can fall as well as rise in value, so you could get back less than you invest.
Debt repayments
Using your excess cash to pay off any outstanding debts, especially those with high interest rates, can be a wise financial move. This guarantees a return by reducing the amount of interest you owe.
Emergency fund
Establishing or boosting an emergency fund is always prudent. Keeping money readily available in a high-interest easy or instant access savings account can help cover unexpected expenses without financial stress.
How much cash should you hold?
A sensible approach is to hold one to three years' worth of expenses as cash once you're in retirement.
Inflation can reduce your money's spending power, so holding more cash than you need exposes it to inflation's effects.
How to decide the right amount of tax-free cash
To avoid taking more tax-free cash than necessary in the future, it's essential to calculate the appropriate amount.
Consider your immediate financial needs, future income requirements, and potential investment opportunities. Consulting with a financial adviser can help provide personalised guidance based on your financial situation and retirement goals.
By carefully managing any excess tax-free cash and planning your withdrawals accurately, you can maintain a stable financial future while making the most of your pension benefits.
Not sure how to find a savings account for you?
Setting up your savings could be a lot of work, but it doesn't need to be.
Our Active Savings service helps you take control of your cash, while saving you time.
You can pick and mix from easy access and fixed-term savings products from different banks and building societies, with one online account.
You'll get better rates and more choice than a typical high street bank, and it's all in one place.
Moving money between banks and products can be done in minutes.
So, you can get on and enjoy your retirement in the knowledge your money is working hard.
This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248.
The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.
Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).
