Should I take a tax free lump sum out of my pension?
Many individuals approaching retirement age will need to consider whether or not they should take the tax-free lump sum they are entitled to from their pension savings. For some, the decision is already made, while others prefer to take a closer look at the implications it will have on their income longer term.
The rules for taking your pension tax-free lump sum state the minimum age is from 55 years and over. There are exceptions to the minimum age when it may be possible to take the lump sum earlier. For example; if you´re in poor health, it may be possible to take the lump sum earlier, or perhaps the scheme rules allow benefits to be taken from age 50 years.
Should I take a lump sum from my pension?How much can I take as a Pension tax-free lump sum?
Up to 25% is allowed as a pension tax-free lump sum, but there are different rules that apply to the type of scheme you have. i.e Defined contribution (DC) pension or Defined benefit (DB) pension, commonly known as a ‘final salary pension’.
When you take a pension tax-free lump sum, this will reduce the subsequent annual income you receive, so its
important to get the right advice before you make any decisions.
What happens when I take my pension tax-free lump sum?
When you take your lump sum from a defined contribution pension (personal or workplace pension) there are normally
options on how you take the rest of the fund as follows:
- The balance is invested in an income drawdown plan
- Buy an annuity (guaranteed income)
- Or cash in your whole pension fund, subject to tax
Since the changes in pension legislation in 2015, more people are looking for greater flexibility with income drawdown, which keeps most of the pension fund invested for maximum potential growth.
What happens by taking a lump sum from a final salary pension?
Your retirement income in a defined benefit or final salary scheme is based on the number of years contributions were made.
The amount of income is calculated as a proportion of your final or career average salary when you come to retire.
The size of your tax-free lump sum, will have an impact on your retirement income, so getting professional advice is
essential to maximise your benefits in retirement.
Depending on your individual circumstances and the type of pension you have, taking your tax free lump sum may or
may not be recommended. If you’re unsure, speak to our client services team today.