Taking a lump sum from your pension

When you turn 55, you’ll be able to reap the rewards of your hard work and finally start taking your pension benefits should you wish.

There are several options available to you when it comes to taking control of your savings, one of them being a lump sum withdrawal.

Here we will be taking a closer look at what this involves and what you can expect in terms of tax.

Pension benefits explained

Currently, when you reach 55*, you can withdraw your entire pension in one go, but you need to be aware that 75% of your pot will be taxed, just like your income would be.

You could also elect to take lump sums from your pension as and when you need the money, leaving the rest invested, so it continues to grow. 25% of your lump sum taken will be free of UK tax.

Another option is to purchase an annuity, which you can do if you wish to guarantee yourself an income for the rest of your life.

It can be hard to know which one to pick, but it’s worth noting that many people elect to take a hybrid approach and combine different options over time. If you need some more information, check out the MoneyHelper website, a free government service that can help you understand your pension options.

Taking a cash lump sum

To put it simply, taking a cash lump sum from your pension is when you withdraw single amounts of money at a time, as opposed to taking it as a regular income.

25% percent of the money you withdraw can be taken tax-free, and the rest of it is combined with your income and taxed normally. This could be beneficial in plenty of situations, like if you wanted to take lump sums from your pension when needed, while you leave the rest of it to grow.

Since your pension is taxed as income, taking lump sums from your savings and leaving the rest could help you stay in a lower tax band, enabling you to maximise your tax efficiency.

It is worth bearing in mind that if you take out too much at once, you may risk leaving yourself short in the future, so take care to plan ahead.

With some providers, there might be a limit to what you can take in one go. So it’s worth checking first.

What happens to the rest of your pension?

If you decide to take a cash lump sum and leave the rest in your pension pot, the rest of your money remains invested; you don’t have to worry about it disappearing.

Your remaining pot will still be susceptible to increasing and decreasing in value just as it would if you hadn’t touched it.

Any growth it experiences is tax free until you begin to withdraw it, at which point it will be subject to income tax.

Should I take a lump sum from my pension?

Taking lump sums as and when you need them is a superb way to maximise your tax efficiency, as it can enable you to spread your tax-free allowance over time.

Plus, withdrawing a lump sum means you’re no longer tied to your investments or annuities, and you can spend the money how you wish.

This could be a great choice if you need the money quickly or if you want to reinvest your savings elsewhere.

Not every provider will allow you to take multiple lump sums throughout the year, so you may want to check to make sure this option is available to you.

Conclusion

Before making any big decisions regarding pension withdrawal, it’s worth thinking about what kind of lifestyle you need to support in retirement.

Consolidating your pensions can be a great way to prepare yourself for retirement, as bringing together your pension pots can give you more control over your money and how it is invested. Here at iSIPP, we can help you combine your pensions into one easy to manage pot. Find out more about iSIPP and how we can help you here.

*Raising to age 57 from April 2028

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.