Lump sum pension

The taking of a tax free cash lump sum from your pension can often be referred to as a lump sum pension to simplify its meaning. But what a lump sum pension means is that when you come to take the benefits available to you from your pension funds (you must be at least aged 55 to do so) you could take up to 25% of your pension funds as a tax free cash lump sum (lump sum pension) with the residual either being reinvested or used to provide an income.

If you hold a defined benefit scheme however, the amount you can expect to receive as a lump sum pension may be different to 25% of the fund as the amount you will receive will be determined based on the scheme’s accrual rate such as 3/80 of a your wage for each year of service. In such instances your pension scheme booklet should describe what lump sum pension (or tax free cash lump sum) is available to you.

You do not however have to take the full 25% lump sum pension when you decide to take your benefits. You may instead decide to take partial drawdown, where you could choose to receive a lump sum pension of say 5% for 5 years. Or perhaps you only require a lump sum pension of 10% and then wish to keep the remainder invested until a later date (this option could be particularly relevant now that the upper age limit by which an annuity must be purchased has been abolished).

Should you wish to take your lump sum pension earlier than your expected retirement date you may do so in what is commonly referred to as pension release. By taking pension release you may take up to 25% of your lump sum pension and should you require you may also begin taking an income; you do not have to take both.

Note: Releasing your pension benefits early could reduce your income at retirement and therefore is only suitable for a limited number of people and circumstances. The above is based on our understanding of current legislation and tax rules and are subject to change by the government. Tax reliefs referred to are those currently applying. Please note the value of investments can go down in value as well as up and you may get back less than you invest.