Please login or register
to proceed.

Registering is free and easy to complete
in just a few short steps

New to the site. Register here

Should I take my pensions as a lump sum?

It’s a tempting prospect – after a lifetime of work and saving for a pension, you’ve accumulated quite a nest egg. Under the new pension reforms coming in from April, you’ll be allowed to take the lot out and do what you want with it. Here are a few things that you need to consider.

The reforms and how they will affect you

From April, anyone aged 55 or over in a Defined Contribution pension scheme will be allowed to use their pension as they wish.

As well as the option to take a 25% tax-free lump sum and buy an annuity with the rest, or use income drawdown if you qualify, as at present, you will be able to take as much of your pension out as you like, using the rest almost as a ‘pension bank account’.

You could take out all your savings as a single lump sum, if you wanted.

Why take your pension lump sum

There are several reasons why you might want to take your entire pension as a lump sum. It might be appropriate to use your pension to pay off your mortgage or other debts that could cause financial hardship in retirement.

Alternatively, you might have been a member of a Defined Benefit pension scheme for most of your career, so your money purchase savings might be small.

Under what are called ‘Trivial Commutation’ rules, if you have small pension pots worth less than £30,000 in total, from April 2015 you can take your entire savings 55 (previously 60) - with 25% of it tax-free. The remaining 75% will be taxable. Or you can take up to three pension pots worth up to £10,000 each as lump sums, again with 25% tax-free.

You might even want to blow the lot and buy a sports car. But before you start watching Top Gear for some car-buying advice, bear in mind the tax implications of a pension lump sum.

Think about the tax man

Although the first 25% of your pension lump sum is tax free, the other 75% is liable for income tax at your marginal rate. Depending on how much you take out in a year – including your State Pension and any other income – you could be taxed at the 20% Basic rate of income tax, or the 40% Higher rate – even the 45% Additional rate.

It’s also possible that you might end up paying more tax on your pension than the value of the tax relief applied when you paid in. For example, if you were a Basic rate taxpayer, the government will have paid in 20% to your pension as tax relief, but you may lose out if you end up withdrawing an amount that puts you into the 40% Higher rate band.

As with all major financial decisions, it’s worth taking financial advice before making your mind up. For more information on tax in retirement visit the government's website.

This article has been commissioned by retiresavvy and any opinions voiced are the author's own.

Follow retiresavvy and get all the latest articles