Should I take my pension lump sum?

When you come to start taking an income from your personal or workplace pension, you will usually get the option of taking a 25% tax free cash lump sum. Many people tend to take the money and use it for a number of different things: reinvestment, carry out home improvements or splash out on holidays or a new car.

Since April 2015, you’ve been able to withdraw as much of the money as you want when you reach 55, although any more than 25% and it will be taxed as income.

However, although most people take the 25% you should consider whether it is the best way given your individual circumstances.

Things to think about…

Do you need the money now?

It’s a good idea to only take cash if you need it. Any money removed from your pot won’t benefit from the same tax advantages, so if you have money in other investments you could consider using that first. The more you take now, the less you’ll have in the future.

Pension 25% tax-free cash

Watch your withdrawal doesn’t take you into the next tax band

Once you take more than your tax-free cash limit you’ll pay income tax on the rest. You could end up paying a higher rate of tax if your withdrawal added to any other income in that tax year takes you into the next tax rate band. You could pay less tax if you spread out your cash withdrawals and keep below higher rate bands.

Payments into any pension could be restricted

Taking out more than your tax-free cash limit (when you start accessing taxable income) restricts the future payments you or an employer can make to any of your pensions, normally to £10,000 a year. This can be a problem if you’re still earning and either have other savings you want to pay into a pension or intend to make significant contributions into any of your pensions.

What are you going to live on in retirement?

Taking cash from your pension savings now means there will be less to provide an income in the future. You’ll not only miss out on the cash you have taken but also the investment growth that you might have earned on that cash.

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