If I Cash in My Pension Will It Impact My Future?

If I cash in my pension will it affect my benefits?

Cashing in your pension may indeed affect your eligibility for certain benefits, as well as the amount you receive from them.

The impact on benefits can vary depending on the type of benefits you receive and the amount of pension income you cash in.

Here are some potential ways cashing in your pension could affect your benefits:

Means-tested benefits

Means-tested benefits, such as income-based benefits like Universal Credit or Pension Credit, take into account your income and assets when determining eligibility and benefit amounts.

Cashing in a pension could increase your income or assets, which may lead to a reduction or loss of means-tested benefits.

It’s essential to understand how changes in your financial circumstances, including pension withdrawals, can affect your eligibility for these benefits.

State Pension

Cashing in a private pension does not directly affect your entitlement to the State Pension.

However, if you receive a lump sum from your pension and invest it or hold it in savings, the interest or income generated from those funds could potentially affect your entitlement to means-tested benefits or taxation of your State Pension.

Disability benefits

If you receive disability benefits, such as Personal Independence Payment (PIP), cashing in your pension may not directly impact these benefits, as they are not means-tested.

However, any changes to your overall financial situation could indirectly affect your eligibility for other support services or benefits related to disability.

Tax credits

Cashing in a pension could increase your overall income, which might affect your eligibility for tax credits, such as Working Tax Credit or Child Tax Credit.

Changes in income levels could impact the amount of tax credits you receive, so it’s essential to report any changes to your income promptly to HM Revenue & Customs (HMRC).

Can I cash in my State Pension?

The short answer is: no. You can’t cash in your State Pension in one lump sum.

If you reached State Pension age before 6 April 2016 and choose to delay taking your State Pension for at least one year, you have the option to claim a lump sum payment instead of increased weekly payments when you eventually claim your pension again.

This lump sum consists of the deferred pension amount plus interest of 2% above the Bank of England base rate and is taxable as income at your marginal tax rate.

In this type of circumstance, the State Pension increases by the equivalent of 1% for every five weeks of deferral, which amounts to approximately 10.4% for every full year of not claiming.

Of course, for many people, this scenario won’t apply. So what then?

Well, for anyone reaching retirement age on or after April 2016, there is no lump sum option available for deferrals.

However, if you can afford to delay claiming, you can increase your State Pension by 1% for every nine weeks you defer.

This amounts to just under 5.8% for every full year that you hold off on claiming.

It’s important to note that deferring your State Pension is a decision that requires careful consideration and planning.

While it can lead to higher pension payments in the future, it’s essential to assess your short- to medium-term financial needs and circumstances before deciding whether a deferral is the right choice for you.

Should I cash in my pension? Get advice from Hilltop

Even after reading this guide, chances are you may still be pondering the question: “Should I cash in my pension?”

If that’s the case, it’s worth taking a step back and seeking professional advice before making a final decision.

When it comes to cashing in a pension, it’s crucial to consider how that course of action might affect your benefits and your overall financial situation.

Consulting with an experienced Hilltop financial adviser can help you to understand the potential implications and explore strategies to mitigate any adverse effects on your benefits.

Researching and understanding the rules and regulations surrounding benefits eligibility can empower you to make informed decisions that align with your financial goals and needs.

For detailed information about the potential impact that lump sum payments can have on benefits, check out this in-depth guide from Scope.

For pension advice that fits around your lifestyle, arrange a callback from a Hilltop financial adviser or call us directly on 0161 413 7051.

Our professional advice is always relevant, personalised and tailored to you.