At a glance

If you choose to take all of your pension account out of the Plan as a cash lump sum, arrangement, you’ll have:

One cash lump sum – based on the value of your pension account.
Tax-free cash – the option to take up to 25% of each lump sum as tax-free cash.
To move to a Drawdown arrangement – in order to take multiple cash lump sums.

Does this option meet your needs?

We don’t regularly think about the financial implications of getting older, such as the possibility of needing care or how long you’ll live for. But as you approach later life and need to make a decision about your retirement income, it is important to think ahead.

Only you know your financial circumstances – for example, whether loans or mortgages still need to be paid off and the sort of needs you may have later on. See the Retirement Living Standards which show you what life in retirement looks like at three different levels of income.

On average*, 65-year-olds in the UK live until they are:

Men: 84
Women: 86

*Office for National Statistics: National life tables - September 2018 (latest release)

Things to consider

Here are some things to help you consider which options will be right for you. The items highlighted in orange are the most relevant when considering taking a cash lump sum:

Your pension account is your main or only source of retirement income

Taking your pension account as one cash lump sum will not provide you with access to a regular income and will require careful management of your spending and investments to ensure you have sufficient income throughout retirement.

Or, you have other sources of retirement income in addition to your pension account

You may prefer to take your pension account as a cash lump sum if you:

Are not reliant on the income from your pension account for your retirement; and/or;
The value of your pension account is small.

You prefer predictability

By taking all of your pension account as a cash lump sum(s), the total amount you have to fund your retirement is known upfront.
However, you will need to manage your spending and investments to ensure you have sufficient income throughout your retirement.

Or, you prefer flexibility

You are able to invest the cash lump sum outside of a pension arrangement, and use it as and when you wish. Remember, the value may fall as well as rise, depending on where/if you invest it.
However, you will not have the security of a regular income throughout retirement, and it may not be a tax efficient option for you.

You prefer security

You will not have the security of a regular income throughout retirement.
You are able to invest the cash lump sum outside of a pension arrangement, however the value may fall as well as rise.

Or, you prefer opportunity

You have the opportunity to invest or spend the cash lump sum according to your particular needs.

You prioritise short-term income

By taking a cash lump sum (or sums) you may increase the amount of capital available for short-term spending and investment.
You are likely to pay more tax by taking a cash lump sum (or sums).

Or, you prioritise long-term income

You will not receive a steady long-term income, as you would if you bought an annuity.
You will need to ensure you have a sufficient source of income to fund your retirement.

You have a short life expectancy

You have more money available immediately to spend on your priorities before you die.
No specific pension provision will be made for your spouse or civil partner after you die. However, you can ensure that any remaining cash from your lump sum is included in your estate.

Or, you have a long life expectancy

You will need to manage your spending to ensure that you or your spouse/partner have sufficient income throughout retirement.
If you invest your cash lump sum outside of a pension arrangement, you may be required to pay further tax on any investment returns.

Tax

Tax-free cash lump sum

You can take some of your pension account as tax-free cash (usually up to 25% of the value).

Income (subject to tax)

The remainder of your cash lump sum is taxed at the highest rate of income tax that applies to you for that year (20%, 40% or 45%).
Taking all of your benefits as a single cash lump sum is likely to increase the amount of tax you pay as the lump sum will increase your income in the tax year you take your benefits.
You may need to pay further tax charges on any investment returns generated by investing the cash lump sum outside of a pension / Drawdown arrangement.

Future retirement savings – warning!

Once you have started to take taxable withdrawals, the amount that you (and your employer on your behalf) can save into a defined contribution pension in future without incurring a tax charge will reduce to £4,000 a year, due to a restriction known as the Money Purchase Annual Allowance.
You will need to consider this if you are planning to contribute to a pension in future.
You will need to make sure that you tell any other defined contribution pension arrangements that you are continuing to save into that you are subject to the Money Purchase Annual Allowance so that they can assess your contributions against this lower level.
To assist you with this notification, your pension provider should send you a ‘flexible-access statement’ within 31 days of you first taking a taxable withdrawal. You will then need to let your other pension providers know within 13 weeks of receiving your ‘flexible-access statement’, otherwise you may be subject to a fine.

How you can take a cash lump sum

It is possible to take a single cash lump sum minus any taxes straight from the Plan. You will be provided details of how to do this when you request a retirement quote.

Girish's choice

Because Girish had other retirement savings, which would provide him with more than sufficient income in retirement, he wanted to take this pension as a cash lump sum. So, after taking financial advice, he transferred out of the Plan, took a cash lump sum and used the money, after tax, to enjoy his hobbies.