Taking a cash lump sum

Sarah wants a cash lump sum

Age: Just turned 60

Occupation: Sales Assistant in local shop

Retirement savings: £32,000 in one plan

Plans for the future: Carry on working in the shop and live off my wages

Other income? None – have to wait until I'm 66 to take my state pension

What I'd like to do with my retirement savings:
Take it all as a cash lump sum

Can Sarah do it?

Yes. As Sarah is over 55, she can take all her retirement savings as a cash lump sum.

25% of the cash lump sum (£8,000) will be tax-free. She'll pay income tax on the remaining £24,000 through a system called Pay As You Earn (PAYE).

Depending on any other income, this taxable £24,000 may push her earnings for the year into a higher tax bracket – so Sarah might have to pay more tax.

She may be able to take the cash out in smaller chunks over a few years. By doing this, Sarah would reduce the risk of straying into a higher tax bracket. It depends how badly she wants all the cash now.

Think taking a cash lump sum is right for you?

By the way..

  • Sarah should remind herself why she was saving this way in the first place – if she takes all her retirement savings out as a cash lump sum, she may have no income apart from her state pension to see her through her retirement.
  • Sarah could take some cash and use the rest of her retirement savings to buy an annuity. If she lost her job at the shop, what would she do for income? Sarah's state pension isn't payable for another six years – and will it be enough anyway? An annuity would secure her an income for the rest of her life.
  • As Sarah has retirement savings of £32,000, drawdown (flexible income) is unlikely to be an option for her as her retirement savings are less than £50,000.
  • Taking such a large one-off payment might affect any means-tested state benefits Sarah is claiming. For more information on means-tested benefits, take a look at Gov.uk[ this link opens in a new window – Zurich is not responsible for the content of external websites ]
  • The tax code the pension company have to use may not be relevant to Sarah's circumstances. This may mean they have to deduct more or less than Sarah may expect. If she pays too much tax, she'll have to claim any excess back from the taxman. If she pays too little tax, Sarah may have to pay more.
  • Sarah can still pay into her pension plans if she wants to but if payments exceed £10,000 a year she'll be subject to a tax charge on the excess amount.
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