Cash lump sum option

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 £10,000 each year.

All the tax-free lump sums you take will count towards your lump sum allowance of £268,275. This is a limit on the total amount of tax-free lump sums you can take. This limit may be higher if you have protection from the lifetime allowance.

The rules are different for 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 benefit 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.

Tax-free lump sums you take from defined benefit schemes will also count towards your lump sum allowance of £268,275. This limit may be higher if you have protection from the lifetime allowance.

For more information read our Guide on Turning your pension savings into an income for retirement.