Using a lump sum

Can you simply take out a lump sum of money from your pension? What are the implications and what should you think about? Well, the good news is that you can take out a lump sum. But how much you take, and when you take it out, will have an implication for the tax you may have to pay on that money.

So how much can I take out, tax-free?

Up to 25% of your pension can be taken out as a lump sum, tax free. So if your fund is worth £100,000, you should be able to take £25,000 out. There are some circumstances in which the tax free cash may be more or less than the normal 25% – an older defined benefit scheme may calculate tax free cash differently, for example.

When can I take the money out?

You can usually take the tax free money out at any time after 55, whether you retire or not. There are proposals in place to raise that age limit to 57 by 2028, although this does require a change in the law. From 2028 the government plan to link it to increases in the State Pension Age so that there is a 10 year gap between them. 

Is there any reason why I wouldn’t take the whole 25% tax free?

Much depends on your plans for the future. If you’re in a defined contribution plan, you may want to take as much as you can. Otherwise, in a defined benefits scheme, you’ll be bound by the ‘commutation rate’: a rate at which the company will exchange pension for cash.

So, if your company offers you a commutation rate of 15:1, for example, then for every £15 of cash you take you’ll lose £1 of pension. It’s difficult to know whether that’s a good deal without knowing exactly what benefits the scheme provides.

This is a complex issue. If you’re concerned about this, you should seek professional financial advice.

What if I want to take more than 25% out?

While the 25% of your pension that you can take as a lump sum is tax free, anything above this is treated as earned income and taxable. So basically, the 25% will be tax free, but anything over this will be taxed accordingly.

If you are buying an annuity using your entire pot, you will need to do this prior to buying the annuity. However, not every provider can offer this.

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