Can I cash in a frozen pension?

can i cash in a frozen pension (1)

This page was last updated on 1 November 2020

Can I cash in a frozen pension?

Many people are unclear about the rules surrounding workplace pensions. It can seem especially confusing if you are in a situation where you have pensions from different parts of your employment history.

Fortunately, frozen pensions are easier to manage that you might realise. This article guides you through everything you need to know about frozen pensions. It gives you expert guidance and answers some of the most frequently asked questions about frozen pensions, such as:

  • What is a frozen pension?
  • Can I cash in a frozen pension?
  • Can you cash in frozen pensions before age 55?
  • Should I cash in my frozen pension?

Continue reading for information that will help you make a decision about your frozen pension pot.

Topics that you will find covered on this page

You can listen to an audio recording of this page below.

What is a frozen pension?

A frozen pension is a workplace pension scheme from an employer that you no longer work for. As soon as you leave jobs at companies, your pension is frozen, in the sense that you often can not contribute to it any more.  However, if it is a defined contribution scheme, the money will continue to remain invested.  

What can I do with a frozen pension?

An immediate question to ask, where you have a defined contribution scheme, is what you can do with frozen pensions to stop the risk of losing too much money to the regular management fee. This of course can be offset by investment returns, but nevertheless something that you need to consider.

One choice is pension transfers. This is when you transfer your pension plans and pool your pots together in order to be able to continue contributing and to save an amount of money on maintenance costs. 

But, this may not always be possible with the rules of your pension provider. For example, public sector schemes do not allow transfers under their named restrictions.

Here is a short video on transferring frozen pensions.

Should I transfer my frozen pension?

The benefits of pooling your pensions are that:

  • You won’t be charged multiple times for management across private or state pension schemes.
  • You can potentially build up more money by contributing to one pension provider’s service.

However, there are some things that you need to look out for if you are planning on making these changes to your frozen pensions.

For example, if you decide you would like to transfer your frozen pension, make sure you are aware of any exit fees in the terms of your contract. You may find that you will lose more money due to these charges by transferring your scheme than if you had just left your frozen pensions alone elsewhere. 

Speak to independent financial advisers to understand the pros and cons of the offer and its fine print. All specialist pensions advisers should be authorised and regulated by the Financial Conduct Authority.

Will I lose any benefits by transfering my pension?

Another issue to be aware of is the terminology of your paperwork. Understanding whether your pension scheme is called a “defined contribution scheme” or a “defined benefit scheme” will help you work out if you would lose any pension benefits by leaving the provider.

For example, a defined benefit pension gives you a guaranteed income for life. This salary pension increases at the rate of inflation. Transferring to another deal may cause you to lose this valuable feature of benefit pensions.

You can speak to an independent pension specialist if you are confused about your entitlement to benefits under any of your frozen pension schemes. Advisers will be able to support you in working out your options, and can give you as much financial advice as you need.

Can I cash in a pension from an old employer?

Yes. The money you built up as a member of old employers’ schemes is rightfully yours. 

As such, you can withdraw money from a frozen pension, either as a lump sum or final salary, depending on the type of pension you had with them. 

This can be a good idea because with defined contribution pensions you won’t be able to contribute once your pension has been frozen. 

"A frozen pension is a workplace pension scheme from an employer that you no longer work for. As soon as you leave jobs at companies, your pension is frozen, meaning that you can’t make any more contributions, unless it was classed as a personal pension."

How do I find out if I have a pension from an old employer?

If you have worked in many different jobs at each step in your career history, you might be unaware of belonging to past pension schemes. 

If you think there are high chances that you have forgotten about frozen pensions, you can call the government-run Pension Tracing Service helpline. They can help you finish your research into forgotten pensions. 

They will use their sources to find out which pension providers your old employers used and give you their contact details so that you can call them. Then, you will be able to ask whether you have any outstanding benefits with their scheme. The requirement for using this service is that you provide your past employers’ names. 

Be careful that you are speaking to the free government service, and not someone operating under a similar name. Check the professionalism of who you are speaking to and remember the government promise that there will be no charge at any point in their service. If someone is asking for payment for any part of their services, don’t oblige.

The process can take a long time, so make sure you start looking in advance of when you need the extra finances.

cashing in pension

Can you cash in a frozen pension at 55?

Yes. Since the pension review in April 2015, we have had more pension freedoms in the UK. Now, you can access cash from pension pots at the age of 55. However, from 2028 you will only be able to withdraw a pension from age 57.

You can cash in pension at 55 even if your defined contribution pension or defined benefit pension has been frozen because you left your old employer. You can even continue working past retirement age while taking money from your pensions and continuing to contribute to the pensions pots to keep them topped up.

It is possible to take frozen workplace pension money early (i.e. before State Retirement age) because the cash you have built up in your old pension plan is rightfully yours. Even though you can no longer make contributions to frozen pensions, the pension savings are still your own. 

Can I cash in my pension before 55?

No. Early pension withdrawal is not possible before the age of 55, except in cases where you are severely ill. 

Ill health may mean that you can take money out of your pension scheme if:

  • Your life expectancy is less than a year due to your illness
  • Your pension plan is worth less than the lifetime allowance of £1,073,000 (as per 2019/20 tax year)

If both of these conditions are met, then cashing pension plans early and tax free may be possible. It depends on the exact rules of your pension schemes, so you should speak to your pension company.

You can read government advice about exceptions for ill health circumstances here.

Can I cash in my pension at 30?

No. If someone tells you that you can release pension funds before the age of 55, they are likely trying to defraud you and get you to break the law. 

These scams are called “pension liberation”. The fraudsters charge large fees to release your cash, and then the government will fine you a large tax charge penalty for breaking the law.

cash in a pension

What is “pension liberation”?

Pension liberation scammers charge you to access the value of your pension fund before age 55. However, there is no “legal loophole” for early pension release and cashing a pension in early (before the age of 55) will mean you are charged large fines and fees.

For example, HMRC will charge you a 55% tax penalty on your entire pension fund, not just the money you withdraw. This would leave you and family with little to no retirement savings to live on in the future.

Always check the credentials of who you are speaking to. You should also be aware that a cold telephone call or unsolicited email is usually a clear sign that the person contacting you may be a scammer, even if they seem to know personal details about your pension providers or pension income. If you think there is a chance that you have come across pension liberation scammers, you should report them.

If you are unsure about the rules of releasing pension early, speak to your pension provider administrators or an independent financial adviser. They will be able to guide you through your pension options and help you with retirement planning.

Should I cash in my pension?

Deciding whether to take cash for pension can be tricky for several reasons

You and your loved ones may need the money right now to pay off debt, or you might be considering cashing in pension pots to reinvest the money or make home improvements.

However, when thinking about the option of cashing in a pension you should remember that while it will be helpful to take out a lump sum of cash now, it may leave you worse off in retirement. Withdrawing money before State Pension age may result in you not having a secure source of retirement income in place.

Your quality of life might therefore be lower, as your income won’t change with the level of inflation. You may also leave less money to your spouse and trustees after your death. You may also lose your entitlement to state benefits, and the tax rate you pay may increase.

cash in pension at 55

What counts as a small pot pension?

Small pot pensions are valued at £50,000 or less. The rules for cashing in small pot pensions may work slightly differently depending on the basis of your pension provider’s terms.

You can speak to specialist pensions advisers for help understanding how withdrawing money from your small pot pensions would work for you. Make sure that the adviser you are speaking to is operating legally – if so, they will be authorised and regulated by the Financial Conduct Authority.

What are the benefits of cashing in frozen pensions?

That being said, the Financial Conduct Authority found that cashing in small pension pots (worth less than £30,000) is becoming an increasingly popular choice in the UK. As mentioned above, you can spend the money from pensions on whatever you like: 

  • Travel and the holiday of a lifetime
  • Moving house or making improvements to your home property
  • Purchasing a new top of the line car
  • Paying off a mortgage, or getting your debts under control
  • Buying an annuity to give you a final salary for life
  • Making investments

Ultimately, it is your decision whether or not to cash in your pension. But getting in touch with independent financial advisors might help you figure out what is best for you and your beneficiaries. It will also help give you peace of mind knowing that you are taking financial advice and tips from someone with experience.

How much tax will I pay if I cash in my pension?

The first 25% of your pot is tax free pension money. After this, you will be charged income tax, at your marginal rate,  on the remainder of the capital you withdraw from your pension (the other 75%). You pension providers will subtract any tax you owe before transferring you your money.

Because of the way the tax bill works, it can be a good idea to drawdown over a range of several tax years. If you conduct the cashing in process this way, you will make smaller income tax payments overall. 

This can have a big impact on how much cash you and your estate receive in total.

Can I take my pension as a lump sum?

Yes. Many pension firms give you the flexibility to take out your pensions as a cash lump sum. 

As mentioned above, you will be charged income tax on amount you withdraw, over and above your tax-free cash allowance of 25%. So, choosing not to take your money as a lump sum but over the course of several tax years can give you some tax relief and mean that you lose less money to tax. 

The administrators of your old employer’s scheme can provide more information about how you will be taxed. The organisation staff can also tell you more about how cashing in your frozen pension would work in line with their terms.

Your age, your financial circumstances, and the type of pension scheme you have acan all make a big difference when thinking about withdrawing pensions before retirement. 

If you are feeling any hesitation, speak to an advisor. They can set you on the right track and help you with your enquiry.

Article author

James Lloyd

I am the primary writer and author for Help and Advice, having originally helped start the site because I recognised that there was a need for easy to read, free and comprehensive information on the web. I have been able to use my background in finance to produce a number of articles for the site, as well as develop the financial fitness score tool. This is a tool that provides you with practical advice on improving your personal financial health.

Outside of work I am a keen rugby player and used to play up to a semi-professional level before the years of injury finally took their toll.  Now you are more likely to see me in the clubhouse enjoying the game.

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