Cash lump sum in detail

Think taking a cash lump sum is right for you?

How it works in detail

  • You decide how much to take and when, you just need to let your pension company know
  • 25% of every cash lump sum you take will be tax-free – you'll pay tax on the remainder
  • The tax code that the pension company have to use may not be relevant to your circumstances. This may mean they have to deduct more or less than you expect – you'll need to claim back any excess tax or maybe even pay more

If anything is left in your retirement savings -

  • You choose what funds you invest your money in
  • Every year, you will be sent a statement from your pension company stating the funds you're investing in, their value, future projections and any transactions you've made
  • You're responsible for checking your investments to make sure your funds are performing as expected

Before you make a decision, you should consider the following:

How much income you'll have when you stop working

Before taking a cash lump sum, make sure you'll have enough income to support yourself when you're no longer working. The more of your retirement savings you take as cash and spend, the less you'll have left to provide an income when you need it.

Your spending habits

Be careful how you spend your money – it may need to last a long time.

Tax implications

Only the first 25% of a cash lump sum is tax-free. You have to pay tax on the rest. This will increase your tax bill and could push you into a higher tax bracket. Think about how much of your or basic rate tax-band you have left before deciding how much cash you want to take.

For example:

You're still working and have an income of £20,000 a year

If you cash in £40,000 of your retirement savings, £10,000 is tax free and £30,000 is taxable as income

This means you'll have a total income of £50,000 for the year. This pushes you into the 40% tax band, so part of your income will be taxed at 40% tax, even though your normal earnings would only be taxed at 20%.

The tax code that the pension company have to use may not be relevant to your circumstances. This may mean they 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.

Check if you have protected tax-free cash

If you have a retirement savings plan provided by an employer that started before 6 April 2006 you might have a protected amount of tax-free cash, which could be greater than the usual 25% of the fund value. If this is the case, speak to your pension company or employer to find out how this affects your options.

What next?

Taking a cash lump sum is an important decision and it makes sense to read the information on this website and seek financial advice or free and impartial guidance from Pension Wise before you make a decision.
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We can:

  • help you find a financial adviser who can provide you with financial advice
  • provide you with more information and how to proceed if you think taking a cash lump sum is right for you

Whatever you want to do next, we can help.

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

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
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