Lump Sum Pension

What is a tax free lump sum? – Pensionfinder








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    What is a tax free lump sum?

    Post 2006 pension reform most pensions now allow a tax free lump sum of 25% of the value of the fund on retirement. Minimum retirement age for pensions is now 55 after April 2016.  This cash free lump sum is a benefit which makes pensions a more tax efficient vehicle than the alternatives.

    Although, ISA growth is tax free you pay tax on the contributions. Pensions are the other way around with tax free contributions but taxed income on retirement. The lump sum essentially makes the pension 25% tax cheaper. The picture is not this simple though, as it depends on the tax band the pensioner is in and other factors.

    This lump sum can be used for any number of things:

    • a holiday
    • a car
    • pay off debts
    • pay off mortgage
    • to re-invest elsewhere

    There are situations where taking the tax free lump sum is a bad idea, or is even not allowed. You should speak to an independent financial adviser before making any major financial decision of which you are unsure.