Can I take lump sums from my pension pot?

Options for cashing in your pensions

Can I take lump sums from my pension pot?

By Paul Davies

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Can I take lump sums from my pension pot?

Which? outlines the pros and cons of taking lump sums from your pension. Calculate how much tax you’ll pay each time you make a withdrawal from your fund.

How can I take lump sums from my pension?

The April 2015 pension changes introduced a new, flexible way to take money out of your retirement savings. You leave the money in your current pension fund and take out lump sums when you need to.

The technical term for this is ‘uncrystallised funds pension lump sums’ (UFPLS). This just means that you haven't 'crystallised' your pension pot by turning it into an income. It's similar to using your pension like a savings account, taking cash out when you need, with the rest continuing to grow – but there's usually a lot more admin.

Each withdrawal is 25% tax-free, with the rest charged at your normal income tax rate when your other income is taken into account. You can only opt for UFPLS if you’ve not already taken any tax-free cash or income from your fund.

If you take a lump sum, or several lump sums, from your pension in this way, the maximum pensions tax relief (money that would have gone to the government as tax that goes into your pension instead) you can get on your earnings or pension contributions is reduced to £10,000 a year. 

What does it mean for me?

With UFPLS, you can take a series of ad hoc withdrawals from your pension fund or funds as and when you need to access the money.

For each withdrawal, the first 25% is tax-free and the remaining 75% taxed as income. 

Once you cash in (or crystallise) your pension pot, you can take up to 25% tax-free upfront and the rest is taxable, see our example, above.

Not all pension companies will offer UFPLS, so you will need to check with your provider to make sure it's possible if this is your chosen option. 

Some employers or pension providers may limit you to one or two lump-sum withdrawals a year, or apply a charge if you take out all your money within a set period of time.

There may also be charges each time you withdraw money and a limit on the size of the pot, eg LV= only allows it for pots of under £30,000 to replace its previous trivial commutation provision.

Paying tax on your lump sums

If you can go ahead and take sums from your pension in this way, the main things to consider are the tax implications and the possibility of running out of money. 

Spreading withdrawals over a number of years can minimise your tax bill and mean that your tax-free entitlement is spread over several years. 

Which? has created a calculator to show you how much tax you'd pay if you took your whole pot, or a chunk of it, as a lump sum. 

There's more about tax on pensions in our guide to tax in retirement, which also covers allowances and the state pension. 

Taking lump sums are worth considering if…

  • you want to take varying amounts of money each time
  • you want to spread your 25% tax-free allowance over a period of time
  • you don’t want to expose your pension to investment risk
  • you need to take out a larger lump sum for an emergency.

Taking lump sums might not be the best option if…

  • you think you might run out of money
  • you want a regular, guaranteed income for life
  • you want to keep your money invested and benefit from growth
  • you want to avoid any charges
  • you don’t want to transfer to a new provider – not all companies will offer this option.
  • Last updated: June 2016
  • Updated by: Paul Davies