Taking your tax-free lump sum from your pension savings is a stage many people look forward to. But how does it work? And how can you take it? NMTBP investigates

How much do I get as a tax-free lump sum?

Most people will get 25% of their total pension pot tax-free. This can change depending on your pension plan and if you’ve gone over your lifetime allowance, but generally, most people get 25%. You’ll pay income tax on the remaining 75%

When can I get my tax-free lump sum?

You can access your pension savings, including your tax-free lump sum, at the age of 55 (rising to 57 in 2028). In some cases, you can access them earlier – if you’re in ill health or in a particular scheme with a protected age, for example – but these cases are rare, and it’s more likely you’ll need to wait

It’s also important to be aware of any company or scheme that promises you’ll be able to take your pension savings before you reach 55. These are likely to be scams, and you could lose money

 Do I need to take it all at once?

It can depend on your pension product type and what it allows. But in most cases, you can take it bit by bit if you’d prefer. You might even find it more beneficial to do it this way. There are a couple of reasons for this

First, the longer you leave your pension savings invested, the more opportunity they have to grow. So, taking all of your tax-free lump sum at once could mean you get less in your pocket over the long term than you would if you took it in smaller chunks

The second reason is that taking your tax-free lump sum in chunks over time is a tax-efficient way of taking your pension. Remember, you’ll pay income tax on the rest of your pension. So, using your tax-free lump sum as a way to supplement the taxable part of your income could mean that you pay less tax overall

Some people also choose to use their tax-free lump sum to reduce their working hours and start a phased retirement. If you cut back on your hours, you could use some of your tax-free lump sums to increase your reduced salary

The value of investments can go down and up and you may get back less than you paid in. If the overall value of your pension pot falls, your tax-free lump sum will also fall

Laws and tax rules may change in the future. Your circumstances and where you live in the UK will also impact your tax treatment

Some important things to think about

Do you need to take it now?

Your pension savings must last you throughout your retirement – which could be longer than you think. Taking too much at once or too early could mean you’re more likely to run out of money later. As mentioned earlier, leaving your pension savings invested as long as possible gives them more opportunity to grow. So, it can make sense for some people to put off accessing their savings for as long as possible

You might lose state benefits

If you’re entitled to receive State benefits like Universal Credit or Pension Credit, you could lose your entitlement or be able to claim back less if you start accessing your pension savings. This is because your pension savings will count as a form of income or could be treated as ‘capital’. So do check you won’t be impacted by this.

This can change depending on whether you’re over or under Pension Credit age. You can find out more on this from Citizens Advice

Be aware of the amount you can pay in

Taking a tax-free lump sum won’t affect the amount you can pay into your pension plan. Before you access any taxable income from your pension plan, the total amount you can pay in each tax year and still get tax benefits is £60,000, or your total salary, whichever is lower. You’d need to pay a tax charge for anything over this amount

Once you start taking an income from your SIPP, you’ll usually trigger the money purchase annual allowance (MPAA)

When the MPAA is activated, the amount you can put back into the pension pot each year will drop to £10,000. In other words, £8,000 from your contributions and £2,000 in tax relief

This is an important consideration when you’re working out plans for withdrawing your retirement savings, particularly if you plan to keep working and paying after you start withdrawing your money

How do I get my tax-free lump sum?

Depending on your provider, you should be able to do this online, over the phone or by filling out a form.

Taking your pension money is a big decision, and it’s important to consider getting financial advice before taking it. If you don’t have a financial adviser, you can find a list of advisers on Unbiased – an independent site where you can find an adviser in your local area. There’s likely to be a cost of any advice you receive

If you’re aged 50 or over, you could also use Pension Wise, a service from MoneyHelper. They offer free and impartial guidance when it comes to your pension