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Can I really take my pension as a cash lump sum?

Is it really possible to take your pension as cash? The answer, for some pension investors, is YES.

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Thanks to pension reforms in 2015, investors have the option to flexibly draw lump sums directly from their pension at retirement (normally from age 55, rising to 57 in 2028). There is no limit to the amount that can be taken.

Free guide to flexible income: Drawdown vs lump sums

Having the option to take your entire pension as cash may sound appealing, but it comes with caveats. Remember your retirement could last 30 years or more, so your pension income needs to last. You could also face a hefty - but avoidable - tax bill if you cash in your entire pension at once, rather than in stages. Future contributions could also be affected, so it’s important you understand the implications before drawing from your pension.

So what are the circumstances in which you can take a pension as cash? Below we explain three options available, how they work and what the differences are. Please note tax rules can change and the value of any benefits depends on your circumstances.

What you do with your pension is an important decision. Therefore, we strongly recommend you understand your options and check your chosen option is suitable for your circumstances: take appropriate advice or guidance if you are at all unsure.

Have a question?

0117 980 9940


1. Taking lump sums via drawdown - what it is and how it works

Using drawdown, investors have the freedom to draw regular, periodic or one-off lump sum payments directly from their pension, whilst keeping control over where they invest.

Usually up to 25% of the funds used for drawdown can be taken as tax-free cash straight away to spend or save as you wish. Any subsequent income is then subject to tax.

You don't have to move all of your pension into drawdown in one go – you can phase the process and can also start, stop or vary the income you take at any time, which can be tax efficient.

Once a taxable income is taken from drawdown, future pension contributions to money purchase schemes (e.g. personal pensions and SIPPs) could be restricted to £4,000 a year.

Drawdown may appeal to investors who only want to take their tax-free cash entitlement to begin with, those who want the potential to make larger pension contributions before taking a taxable income, or those who simply want flexibility over the income they take. In addition, any pension wealth remaining when you die can be passed on to your heirs, tax free in some circumstances.

Find out more about what happens to your pension when you die

Drawdown is not suitable for everyone, you will need to be happy to accept that investments can go up and down in value so you could get back less than you invest. If you take too much out, investments don’t perform as hoped or you live longer than expected, you could be left short of income later in retirement.

Free guide to drawdown Learn more about using drawdown including the risks and benefits. Download your guide

Income tax calculator

How much income tax could you pay on a pension withdrawal?

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2. Taking an UFPLS (Uncrystallised Funds Pension Lump Sum) - what it is and how it works

UFPLS is the newest option made possible by the pension reforms. The key difference between income taken via drawdown and as an UFPLS is the tax treatment.

With an UFPLS payment, 25% of each lump sum will normally be tax free and 75% taxed as income. If you have reached age 75 and used most of your lifetime allowance (currently £1m), the tax-free percentage could be lower. Find out more about the lifetime allowance

Any remaining pension fund stays invested as you choose so the investment risks are the same as pension funds held in drawdown. As are the options available on death. However, as soon as an UFPLS is taken, future pension contributions to money purchase schemes could be restricted to £4,000 a year.

It is possible to take more than one UFPLS payment. This may appeal to those who want to access their tax-free element in stages, with the potential to increase the overall value, or who do not yet require a regular income.

View a comparison of Drawdown versus UFPLS

Free UFPLS information packFind out more about taking lump sums without going into drawdown or buying an annuity. Request yours now
Have a question?

0117 980 9940


3. Take pensions under £10,000 as lump sums under the "Small Pot Rule" - what it is and how it works

For those who have pension pots worth less than £10,000, it is possible to request the entire pension is paid as a lump sum. You can receive payments of this type from personal pensions up to three times.

If you are able to take your pension in this way, 25% of the lump sum payment will be tax free and the rest subject to income tax.

When taking a lump sum it may be beneficial to use this "small pot rule" where possible as the payment is not measured against the lifetime allowance, and future contributions to money purchase pensions are not affected.

Have a question?

0117 980 9940

How could my pension be taxed at retirement?

Find out how pension withdrawals might be taxed, and how with a little planning, investors can reduce the amount of tax they pay on pension withdrawals

Find out now


Need a more secure income?

If you, like most people, need some form of secure retirement income then it is worth considering an annuity. This is one of the few retirement options that provides a guaranteed income no matter what the market movements are or how long you live. Providing health and lifestyle factors, even minors ones such as being a smoker or slightly overweight, could mean you also qualify for a higher income.

As none of us know how long we’re going to live, it could help reduce the risk of running out of income in your latter years, which would have a dramatic impact on your standard of living.

Please note that the annuity income you receive will depend on your pension value, circumstances and the options you choose. Once set up your annuity cannot usually be changed or cancelled, even if your circumstances change.

See what income you could get: compare annuity quotes across the market now

Nowadays people have the freedom and choice over what they do with their pension. You can also choose a mixture of options to achieve a blend of secure and variable income.

What help is available?

Pension Wise, the government's pension guidance service, provides a free impartial service to help you understand your options at retirement – more on Pension Wise.

This article, our guides and online tools, are not personal advice. We offer a range of information and support to help you plan your own finances. We also have an award-winning team of Financial Advisers who can help you achieve your goals. Our flexible approach means you only pay for the advice you need.

If you have any questions, please call our experienced Retirement Helpdesk on 0117 980 9940 (Monday to Thursday 8am - 7pm, Friday 8am - 6pm and Saturday 9:30am - 12:30pm), you will speak to a real person who will answer your questions in plain English.

Drawdown versus Uncrystallised Funds Pension Lump Sums (UFPLS)
 

UFPLS

Drawdown

Why might you consider this option?
  • You wish to receive your tax-free cash in stages, or to withdraw your entire pension in one go.
  • You want the option to draw a variable income of your choice.
  • You want the potential to increase any remaining pension through investment growth but are comfortable the pension is invested so future income is not secure and could fall, or even run out.
  • You want to receive your tax-free cash as a lump sum.
  • You want the option to draw a variable income of your choice.
  • You want the potential to increase any remaining pension through investment growth but are comfortable the pension is invested so future income is not secure and could fall, or even run out.
Do I have to use my whole pension?

No – you can take lumps sums as and when you require income.

No – you can move funds into drawdown in stages (known as partial or phased drawdown).

What decisions do I need to make at the start?
  • How much you wish to withdraw. Usually 25% of each withdrawal is tax free, the rest is taxable.
  • Where to invest your remaining pension.
  • How much of your pension you want to move into drawdown (usually up to 25% of this amount can be taken as a tax-free lump sum up front).
  • Where to invest your pension.
  • How much (if any) taxable income you wish to take.
How will income be taxed?

Usually 75% of each lump sum will be subject to Pay As You Earn (PAYE) income tax.

When you decide to take income from your drawdown funds, each payment will be subject to Pay As You Earn (PAYE) income tax.

Will future contributions be restricted?

Flexibly accessing benefits via an UFPLS or drawdown can affect your future pension contributions by triggering the money purchase annual allowance (MPAA). Once triggered, contributions into SIPPs and other money purchase pensions will be restricted (to £4,000 per tax year). This will be triggered:

  • As soon as your first UFPLS is taken.
  • Once your first income payment is taken. Just taking the tax-free cash will not trigger the MPAA.
What happens to the pension when I die?

If you die before age 75 any funds remaining in the pension can be paid to your nominated beneficiaries, tax free in most circumstances. If you die at or after age 75 income paid to your beneficiaries will be taxed at their rate of income tax. Find out more about what happens to your pension when you die.