A guide to taking a cash lump sum from your pension

You can take a cash lump sum from your pension savings however you like; it is entirely up to you.

A cash lump sum is when you take the money built up in your pension savings as cash. The first 25% of each cash payment will usually be paid tax-free, while the rest will be taxed as income at your normal rate.

When it comes to your chosen retirement date (currently the earliest you can retire is age 55, increasing to age 57 from April 2028), there are lots to things to consider.

After taking your cash lump sum, you will have several options. Firstly, to buy a secure income, known as an annuity, with the pension savings you have left in your plan. The income amount will be determined by the amount you have, your age, health and options you choose. Secondly, you can use Drawdown to take as much or as little income as you like. A combination of the two is also possible.

If you chose not to take any income, then the Money Purchase Annual Allowance (MPAA), will not be triggered, hence you can continue keep putting money into your plan and benefit from tax relief on your contributions.

By taking an income through Drawdown, the MPAA can be triggered and this allowance limits the amount you can contribute back into a pension to a gross amount of £4,000pa.

If you have £10,000 or less saved in your plan, it would possibly be classed by HMRC as a ‘small pot’ and you can usually cash in up to three pension plans as a small pot without triggering the MPAA.

How will I be taxed?

The first 25% of each cash payment will be paid tax-free. You may need to pay income tax on the remaining 75% at your highest marginal rate.

If you have money left in your plan when you die, it can be passed on to your loved ones – usually free from inheritance tax.

  • If you die before age 75, your pension savings can normally be paid to your loved ones however they like, tax free.
  • If you die aged 75 or older, your pension savings can be paid to your loved ones however they like, subject to income tax.
  • Once you’ve taken the cash lump sum from your plan, you can’t usually change your mind.
  • You will be restricted on how much you can contribute towards your retirement before a tax charge applies.

We hope the above gives you some additional information to think about but the best thing to do is to get in touch and we can talk through all the options available to you.

Please note: Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

Scroll to Top