The money in your pension pot is yours, and you can take it all as a cash lump sum if you want to.  However, it’s important you understand the implications of doing so as you could end up paying a lot more tax than you need to or even worse, you could run out of money altogether as you go through retirement.

There are two sets of rules that allow you to take your whole pension pot as a lump sum.  Which one applies to you will depend on how much your pension pot is worth.

 

There’s no limit to the amount you can take as a lump sum, but there are some things you should be aware of:

  • The first 25% of your payment will be paid tax-free
  • The remaining 75% will be taxed in the same way as income you’ve earned.  This means you could end up paying 40% or 45% tax on the remainder of your lump sum
  • If you take your money in this way the amount you can pay into other money purchase pensions each year (known as the annual allowance) will be reduced from £40,000 to £4,000
  • The payment will be measured against the lifetime allowance
  • The technical name for this type of payment is an Uncrystallised Funds Pension Lump Sum (UFPLS)

 

It’s possible to accrue several pension pots over the years, particularly as you change jobs throughout your lifetime.  As a result, the government have a separate set of rules, known as small pots rules, for pension pots worth £10,000 or less:

  • The first 25% of your payment will be paid tax-free
  • The remaining 75% will be taxed in the same way as income you’ve earned.  This means you could end up paying 40% or 45% tax on the remainder of your lump sum
  • Taking your pension pot under small pots rules doesn’t affect the amount you can pay into other pensions
  • The payment won’t be measured against the lifetime allowance
  • There is no limit to the number of workplace pensions you can take in this way, but you can only take a maximum of three non-workplace pensions like this. If you’re not sure if your policy is a workplace pension you should ask your pension provider.

Getting help

ReAssure is unable to provide financial advice or make a personal recommendation, but we can provide you with factual information about your policy and your options.

However, there are places you can go for help.

How can I find out how taking my whole pension pot as a lump sum could affect me?

You can use our Retirement Planning Toolkit to see how the different options available, including taking your whole pension pot as a lump sum, could look based on your own pension savings.