Should you take your 25% tax-free pension lump sum?

Deciding if you should take your 25% tax-free pension lump sum can be difficult. However, one of the most popular perks of saving into a pension is having the option to pocket 25% tax-free cash when you stop working. Many of our clients have already decided how they are going to spend their lump-sum by paying off a mortgage, luxury holidays, camper-vans- the list is endless!

Before you indulge in what the money can buy you, there is another option, not to take the lump sum.

You could leave your pension alone to continue to grow to provide a higher income over the course of retirement.

Unless you have a definite plan for your cash, this can be a wise decision. You are still able to get 25% of your pot tax-free even if you opt to withdraw gradually in smaller amounts. You will lose the tax-free perk if you tie up your entire pot with annuity or income drawdown scheme.


Things to consider:

Do you need the money?

What impact will it have on your comfort in retirement later?

What kind of pension scheme do you have?

Will you end up paying more tax?

Will the Government change the rules? 

'I don't want to take my lump-sum all at once, what do I do?' 

This is common for many of our clients who do not necessarily need to take out the tax free cash.
There are a number of options to consider:

  • Leave it invested in your pension for when you need it, when you decide to withdraw the cash you will receive 25% tax free cash from each lump sum you withdraw. 
  • Take 25% tax-free cash, then buy a flexible drawdown product. This is different as you only get taxed on the remaining funds when you withdraw- this usually keeps you in a lower tax bracket.
  • Take 25% tax-free cash, and then buy annuity which provides a secure income for life. 
tax-free lump sum pension

It is important that no actions should be taken without advice, and the risk warning should be taken notice in all cases. Personal circumstances and risk profile mean that the advice for one person which may not be the same for everyone.  Reeves Independent cannot give advice on Defined Benefit Schemes, all enquiries will be passed to a specialist third party. 

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