Cash lump sum

A cash lump sum

You can take a cash lump sum from the retirement savings you've built up over the years – you don't have to take it all at once. When you get your cash, you can do whatever you want with it, save it, spend it or even help your children out financially – it's up to you.

But, remember why you were saving in the first place – to provide an income when you're no longer working. And, once it's gone, it's gone.

Tax

Before you decide what to do, you need to think about the different ways cash lump sums are taxed and the impact taking a cash lump sum will have on your tax position.

What's taxed and what's not

  • 25% of each cash lump sum can be taken tax free and the rest will be taxed as income.

    If you take a cash lump sum, payments can still be paid into a pension plan but if these payments exceed £10,000 a year, the excess amount could be subject to a tax change. You can read more about this in 'A guide to pension tax'.

  • If you're under 75 and seriously ill (unlikely to live more than 12 months) you may be able to take all of your retirement savings as a tax-free cash lump sum, even if you've not yet reached 55.

Things to be aware of

Leave the rest invested

By only taking cash lump sums when you need them, you leave the rest of your retirement savings invested where they could grow in value. The value of investments could go down which may impact on the pension you receive in the future.

If there is anything left in your retirement savings when you die you can leave a lump sum or an income to someone else.

  • If you're under 75 when you die, lump sums or income will usually be paid tax-free.
  • If you've reached 75 when you die, then any lump sums will be taxed at 45% for 2015/16 tax year. Income and any lump sums from 2016 will be taxed as income for the person receiving it. Any income your beneficiary takes is taxed through PAYE or Pay as You Earn, just as it is if you're employed.

Impact on ongoing savings

Payments can still be paid into a pension plan but if these payments exceed £10,000 a year, the excess amount could be subject to a tax charge. You can read more about this in 'A guide to pension tax'.

Once it's gone, it's gone

If you take all your retirement savings as cash, you need to think about what other savings or income you have including any state benefits. When your retirement savings are gone, they're gone.

Other ways to take cash lump sums

Don't forget, there are other ways to access some of your retirement savings as cash lump sums. You can usually take up to 25% as tax-free cash if you move your retirement savings into drawdown or buy an annuity.

Taking small lump sums

If you're taking a retirement pot worth up to £10,000 or less all in one go, you may be able to take this as a small lump sum. You'll receive 25% tax free and the remainder is taxed as income.

Small lump sums let you take the full value of a pension plan worth up to £10,000 as a single lump sum without affecting the amount you can pay into your other retirement savings. You can take up to three of these payments from private pension plans, but there is no limit on the number you can take from occupational pensions (these are pension schemes your employer set up and appointed trustees to run).

Please speak to your pension company to see if these rules apply to you.

Tax implications

The tax code that the pension company have to use may not be relevant to your circumstances. This may mean we have to deduct more or less than you expect. If you pay too much tax, you'll have to claim any excess back from the taxman. If you pay too little tax, you'll have to pay more.

Impact on tax allowances and benefits

If you take your retirement savings as cash in one go it will be treated as income in the tax year it was paid. This could push your income into a different tax bracket and affect any tax allowances you are entitled to. The amount of income and savings you have can also affect any means tested state benefits you may have. Taking a number of lump sums over more than one tax year may be more tax efficient.

Tax and law

You'll see a lot of information about tax and law on this website. We've based this on our understanding of current UK law and HM Revenue and Customs practice, as at 6 April 2015. Bear in mind, any changes to these rules, or to your personal circumstances, could affect what you get from your retirement savings.

Watch out for fraudsters

Whatever you do, don't let the fraudsters get their hands on your retirement savings. Fraudsters may offer you tempting ways to invest your cash, they may seem convincing and promise big returns. But the impact on people falling prey to these scams can be devastating – you could lose the lot. Sorry, but if it sounds too good to be true, then it probably is.

How to avoid a pension scam

Drawdown -
how does it work?

Drawdown lets you take some or all of your tax-free cash, leaving the rest of your retirement savings invested.

Drawdown explained

Annuities -
how do they work?

If you're looking for a regular secure income to see you through the rest of your life, then an annuity could be the route for you.

Annuities explained

Looking for advice?

You can get free and impartial guidance from Pension Wise. We can also help you find a financial adviser to give you the advice we can't.
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