Which? uses cookies to improve our sites and by continuing you agree to our cookies policy

Should I take a lump sum from my pension?

By Paul Davies

Put us to the test

Our Test Labs compare features and prices on a range of products. Try Which? to unlock our reviews. You'll instantly be able to compare our test scores, so you can make sure you don't get stuck with a Don't Buy.

Should I take a lump sum from my pension?

Which? assesses the pros and cons of taking a lump sum from your pension. Discover the best course of action depending on your pension type.

Pension lump sums: the basics

When you start to take an income from your personal or workplace pension, you will usually get the option of taking a cash lump sum. 

As the lump sum is generally tax-free, most people choose to take the maximum – but you should consider whether it suits your circumstances before you do. For more on how tax interacts with pensions, visit our guide to Tax in retirement.

Taking a lump sum from your state pension

If you defer taking your state pension, you can earn either extra state pension or a taxable lump sum. To get a lump sum, you have to put off taking state pension for at least 12 consecutive months (this option disappears for those who qualify for the state pension on or after 6 April 2016). For more on what you can expect from your state pension, visit our guide to the state pension.

The lump sum will be based on your normal amount of weekly state pension, with interest added for each week – currently it’s set at 2% above the Bank of England base rate. It will be taxed at the same rate as the rest of your income.

Taking a lump sum from your personal pension

This is quite straightforward. You can take 25% of your pension value tax-free, and then either take the remainder subject to taxation, opt for income drawdown or arrange an annuity. Our guide outlining your income options under the new pension rules will give you a clear idea of your choices for the rest of your money.

Since April 2015, you've been able to withdraw as much of the money as you want when you reach 55, although it is taxed as income.

Taking a lump sum from your workplace pension

Lump sums from workplace pensions are tax-free. The maximum you can take is 25% of your pot’s value, at age 55 (but this can be earlier if you’re suffering from ill health).

If you’re in a defined contribution scheme, be careful, as taking the tax-free lump sum will reduce the pension income you’ll have left over for buying an annuity or going into drawdown. Speaking to a financial adviser beforehand will help you decide if it’s best for you. Our guide, Financial advice explained, tells you how to find a financial adviser.

Taking a lump sum from a final salary pension

It’s more complicated for defined benefit, or final salary, schemes, especially in terms of the impact it will have on your pension income. Different schemes set different commutation factors (how much your lump sum will reduce your retirement income by).

The commutation factor is based on how much money you’ll get for each £1 you surrender. So if your commutation factor is 15, and you take a £15,000 lump sum, your annual income will be £1,000 less than it would have been had you not taken the lump sum. The lower the commutation factor, the more your pension will be depleted.

For example, if you’re in a defined benefit scheme and your pension income would be £10,000 a year, you would be due a lump sum of £50,000. The maximum you can take is 25% of your pension pot, and this is based on receiving a pension for 20 years.

Subscribe to Which? Money Weekly

A free newsletter from Which? Money Compare offering unmissable news, deals and money-saving tips delivered to your inbox every week.

Register here


Pros of taking a lump sum from your pension

  • The key advantage is that the lump sum will usually be tax-free, so is worth taking. You can use the lump sum to pay down a mortgage or other debts, such as credit card bills.
  • You could also invest your cash lump sum, which would potentially get you more income in retirement. The Which? Model Portfolios tool is a good place to start with this. Or, you could put the money in an Isa, to maximise the tax efficiency.
  • Other pros of taking a lump sum include being able to gift the money to your family, such as to help grandchildren with university fees. 
  • If you’re in ill health, taking a lump sum can make more financial sense, because you may not see the benefits of taking out a better annuity.

Cons of taking a lump sum from your pension

  • It’s important to consider the impact of taking a lump sum, as it will deplete your retirement income. You will not have as much money to spend on an annuity or go into drawdown, which could lower your monthly income significantly. However, you could use the lump sum to buy a second annuity later on, although these tend to be more expensive and generate a smaller income. 
  • Taking a lump sum from a final salary scheme can be very complicated, so make sure you know exactly what you're doing. Always seek financial advice when making retirement decisions.

Get a personalised answer to your pension queries

The Which? Money Helpline offers independent one-to-one guidance on a range of topics including pensions and retirement. If you're not a Which? member, and you'd like to get unlimited access to our Money Helpline experts, you can try Which? Money for two months for £1.

  • Last updated: January 2017
  • Updated by: Paul Davies

Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.