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Celebrate retirement

Use your tax-free lump sum to celebrate retirement, buy that dream boat or help the kids get on the property ladder.

The rules around taking this lump sum vary according to the type of scheme. You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. The tax-free lump sum doesn’t affect your Personal Allowance.

 

RFS blog - planning retirement in your 40s

Pensions

You can take up to 25% of a defined contribution (DC) pension tax-free once you pass the age of 55 (57 from 2028).

If you have a defined benefit (DB) pension, then it can be more complicated and we would advise you speaking with us to determine the options available to you.

Normally, you can’t withdraw any of your pension before the age of 55 without paying a tax penalty in the region of 55% tax. There are however certain circumstances where you can cash in your entire pension, earlier than 55 years old. This is usually if you are in poor health or you work in an occupation that traditionally has early retirement age, for example, an athlete. 

RFS blog - income from your pension plan

Taking a lump sum from a DC pension

The decision to take a lump sum from a DC pension is traditionally more straightforward. You can take up to 25% tax-free which then means the scheme is ‘crystallised’. You will then need to decide what you do with the remaining funds – keep it invested in an income drawdown plan, buy an annuity or cash in your entire pension (subject to tax). This may not be the most beneficial route as it comes with tax at the higher marginal rate, which could have severe tax implications. Further, depletion of the fund and longevity of requiring income.

In 2015, changes were made to pensions, allowing a more flexible way to take money out of your retirement savings. This is referred to as uncrystallised funds pension lump sums (UFPLS). It is similar to using your pension like a savings account, taking cash when you need it with the rest continuing to grow. However, there are also tax implications with this too.

tax-free lump sum of money

If you would like to discuss the many options available to you when it comes to Tax Free Lump Sum Payments, please get in touch today and we will be happy to have a discussion about your retirement plans.

Considerations

  • A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of the pension benefits available.
  • Levels, bases of and reliefs from taxation along with 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.

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