Should You Cash in Your Pension When you Retire?

A comment appeared on one of my videos this week that I cannot stop thinking about.
“Pensions are nothing but a big con. I’m cashing mine in for investment.”

I get it. But I want to show you what that decision actually costs, because the reality is quite different from how it sounds.

What most people do
New data from the Pensions Commission shows that nearly half of all pension pots accessed in 2024-25 were cashed in completely.

Of those people, 46% spent the money on a holiday or a car, 27% moved it into a current or cash savings account, and 23% used it to pay off debts.

When researchers asked people whether they regretted it, most said no.

But they admitted feeling anxious about the future, and when asked whether they had considered what the money could have been worth left invested, most said they had not.

That is the gap I want to close.

The numbers

Say you have a £100,000 pension pot and you receive the full State Pension of £12,548 a year. You want around £7,000 extra per year from your own savings.

If you cash out the whole pension, £25,000 comes out tax-free. But the remaining £75,000 counts as income. The State Pension has already used up almost all of your tax-free personal allowance, so nearly the entire £75,000 gets taxed, some at 20% and a large chunk at 40%. Your tax bill on day one: £22,451.

The money you put into savings runs out by year 14.
If you leave the pension invested and draw it down gradually, a quarter of every withdrawal comes out tax-free automatically.

Your total tax bill over 20 years is £21,987, almost identical. But the pension lasts the full 20 years, six years longer. And that £22,451 handed over upfront, left invested at 4% growth, would have been worth nearly £50,000.

A word from Ian Dempsey, Independent Financial Adviser (DipPFS): “One thing that catches a lot of people out is that some schemes pay out the 25% tax-free cash, and it is then partially taxed as if it were a salary for that month. The individual then has to claim it back.

If they are still working, tax codes go all over the place and it is not quite the dream they expected. I have heard plenty of people who did not even know they could claim it back.”

The bigger the pot, the more this matters

I modelled this across pot sizes from £50,000 to £500,000. In every single scenario, the person who cashed out ran out of money before the person who drew it down gradually. Every time.

Cashing out is not always wrong. For very small pots under £10,000 with other income to fall back on, it can be the simplest approach.

But for anyone with a meaningful pot, this is one of the most important financial decisions of your retirement. Run the numbers before you act.

The pension is not the con. Cashing it in without understanding what it costs is closer to the con.

________________________________________________________

This article is for information and education only and is not personal financial advice. Tax treatment depends on your individual circumstances and may change. Speaking to a regulated financial adviser before accessing your pension is always worth it.

Sources: Pensions Commission Interim Report 2026; FCA Financial Lives Survey 2024; DWP Planning and Preparing for Later Life 2024; HMRC 2026/27 tax rates; DWP State Pension 2026/27 (£12,548).