Updated: January 24, 2020

Personal Pension Lump Sum

Want to know all the rules on taking a lump sum from your personal pension? Read on to learn more.

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Richard Angliss

Author: Richard Angliss - Finance Expert

Updated: January 24, 2020

Since the introduction of Pension Freedoms in 2015, people have had more choice than ever when it comes to taking an income from their personal pension savings. In this guide, you’ll learn whether taking your pot as a lump sum is an option for you and what the implications of that will be.

The following topics are covered below…

Can I take all of my personal pension as a lump sum?

Yes. Since personal pensions are usually defined contribution schemes, you will most likely have the option to take all or some of your pension pot as a cash lump sum from age 55. The option to take the entire pot as a lump sum was introduced in April 2015 when the government’s Pension Freedoms measures came into play.

This is one potential alternative to taking income drawdown, buying an annuity or leaving your funds invested, but make sure you’re aware of the tax implications of taking your pension pot in one go and seek professional advice before making a final decision.

If you want to spread your 25% tax-free allowance over a long period, this is possible thanks to another feature introduced under the terms of Pension Freedoms: the option to draw your retirement income as uncrystallised funds pension lump sums (UFPLS).

Uncrystallised funds pension lump sums

Taking an uncrystallised funds pension lump sum (UFPLS) involves leaving your pot invested after age 55 and withdrawing cash when you actually need it. You would essentially be treating your personal pension like a savings account, leaving what you don’t draw out to grow.

Each UFPLS withdrawal under 25% is tax-free but claiming  income this way will only be an option if you haven’t started to draw retirement benefits.

Not all pension providers offer UFPLS withdrawals, but if yours doesn’t, it may be possible to take advantage of this feature by transfering to a scheme that includes Pension Freedoms facilities.

Will my personal tax allowance be affected?

If you draw out lump sums this way, the maximum amount you can continue to pay into your personal pension each year to earn tax relief is capped at £4,000.

The reduced allowance will apply if you have withdrawn over 25% of your pension pot. It includes your own contributions and any income paid in on your behalf, such as an employer or spouse contributions.

Moreover, you can’t bring forward any unused allowance from the previous three tax years to top up your contributions beyond the £4,000 cap.

The money purchase annual allowance will only start to apply from the day after you have taken flexible benefits, so any previous savings will not be impacted.

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How much tax will I pay?

Taking more than 25% of your personal pension pot as a cash lump sum will see the withdrawal taxed at your marginal rate of income tax. This is calculated based on your total income for the financial year. Be sure to check whether this pushes you into a higher tax bracket.

Depending on how much your lump sum is worth, taking your entire pension pot in one go could see your marginal rate of income tax hit 45%, in which case most experts would not advise it.

What’s the maximum lump sum I can take and avoid a heavy tax bill?

Current tax rules for personal pensions state that account holders can take 25% of their pot as a lump sum tax-free from age 55. Anything higher means it’s taxable at the marginal rate of income tax.

Are there any other rules I should know about?

Here is a quick summary of the rules surrounding personal pension lump sums…

  • You typically need to be 55 or over to take a lump sum from your pension
  • If you take 25% or less of your pot the lump sum will be tax-free
  • If you take more than 25% it will be taxed at the marginal rate of income tax
  • You can spread out your tax-free allowance by taking uncrystallised funds pension lump sums
  • You can take lump sums from multiple pensions if you’ve been saving into more than one pot
  • You can take your personal pension at age 55 and continue to work, although this will affect the amount of income you have to last you through retirement
  • A personal pension scheme can pay lump sum death benefits to a named beneficiary, and these are usually tax-free if the member was under 75 and yet to draw retirement benefits
    • If the member was over 75 or had started to draw retirement benefits, the value of the pot would be paid out to named beneficiaries and taxed at the marginal rate
  • Only under exceptional circumstances can you take a lump sum from your pension pot before the age of 55. These include being in poor health or working in a profession that typically has a young retirement age, such as professional athletes

Is there a calculator I can use to work out how much I’ll get after tax?

Yes. The government’s PensionWise website has a free online calculator tool that can tell you how much income your personal pension lump sum will be worth. The problem with these online tools is that they aren’t tailored to your personal profile and offer no content to accompany their output.

While they can be a useful starting point, be sure to speak to an expert who can provide you with bespoke calculations based on your needs and circumstances. The pensions advisors we work with can also help you decide whether taking your pension pot as a lump sum is a better option than the alternatives, based on the detailed calculations they produce.

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To find out whether taking your pension pot as a lump sum is the right option for you call 0808 189 0463 or make an enquiry online. The independent financial advisors we work with can help you decide whether this might be a better alternative to pension drawdown or buying an annuity.

We won’t charge a fee for introducing you to them and there’s no obligation to act on their advice.

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We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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Richard Angliss

Richard Angliss

Finance Expert

About the author

Richard Angliss has made a career in financial services which stretches over 40 years.

His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.

For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.

At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.

With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them.  Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.

He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.

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