Cash lump sum option

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"You can take all your pension savings as a cash lump sum."

"You can take all your pension savings as a cash lump sum."

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Since the introduction of the so called ‘Pension Freedoms’ in 2015 you can now take all of your pension savings as a cash lump sum. BUT BEWARE! Some of the cash is tax-free, but the rest is taxable. It’s added to any other income you have and could push you into a higher tax bracket, which could leave you with a sizeable tax bill.

You can take some or all of your pension pot as a lump sum from age 55 (increasing to age 57 from 2028):

  • Usually up to 25% of your pension can be taken out as a lump sum, tax-free.
  • You can take more than 25% of your pension, but only the first 25% is tax-free.
  • You can take the money whether you retire or not.

If you take more than 25% of your pension pot as a lump sum, the amount over 25% is added to any other income you receive. This could push you into a higher tax bracket. If you take more than 25% as a lump sum and are still contributing to your pension scheme, beware. The amount you can contribute in future, without being hit by a tax charge will reduce to £4,000 each year.

The rules are different for defined benefit schemes.

"Defined benefit schemes": These schemes pay you a guaranteed income each year. The amount you’ll get depends on your earnings during your time in the scheme and how long you were a member for.

Taking cash from defined benefit schemes

The decision whether or not to take a lump sum from a defined benefit scheme isn’t quite so straightforward:

• You may have to wait until the scheme’s usual retirement age to take any lump sum.

• The scheme will offer to exchange pension for cash. This is called the ‘commutation rate’. For example, you may be offered £15 cash for each £1 of pension. It’s difficult to know whether this is a good deal, without knowing what benefits the scheme provides.

• You can’t usually take more than 25% as a lump sum, but there are exceptions:
o If the total value of your benefits – across all the defined benefit schemes you’ve been a member of – is less than £30,000, you can take everything as cash.
o You can take your benefits as cash from any defined benefit scheme where the total value of your benefits is less than £10,000. You can do this three times.

If you have over £30,000 in defined benefits schemes and want to take these as cash, you would have to transfer to a defined contribution scheme. This is not usually good advice as you will be giving up valuable benefits. What’s more, you have to take professional financial advice before making this decision.

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