As of April 2006 with the new pension simplification rules everyone has the right to a lump sum pension of 25% with their private pensions. There are some exceptions to this rule which we will cover later in this guide however, some will be eligible for a greater sum than 25%, and some less than this statutory amount.
Lump sum pension – options available at retirement
Once you reach the age of 55, or over, at the point that you wish to take benefits from your pension, you have a choice to make with regards to income and the lump sum required.
- You are allowed to take up to 25% of the entire pension pot as a tax free lump sum. You will not be taxed on this amount and there are no restrictions on how to use this lump sum.
- You do not need to take the entire 25% of pension pot. It could be 24%, 19%, or even 1% if you so wish. The decision is yours.
- The remaining 75% has to be allocated to either an annuity or an Income Drawdown plan at this point.
- You do not need to take an income from the Pension Drawdown plan until required, the funds just have to transfer into an Income Drawdown plan at this point.
- Once the decision is made with regards to your pension benefits, it cannot be changed at a later point.
Exceptions to this 25% lump sum pension rule
Retirement Annuity Contracts & Executive Pension Plans
Some old Retirement annuity Contracts and Executive Pension Plans are eligible for lump sums greater, and lower, than 25%. These contracts are basically a type of personal pension that is no longer available. Your pension provider will calculate your entitlement to tax free cash, this calculation is usually based on your income levels pre 2006.
Section 32 Policies with Guaranteed Minimum Pension benefits
Section 32 polices pensions are pension plans that accepted pension funds from Occupational Pension Schemes. With some Section 32 policies there may be guaranteed minimum pensions benefits attached. These benefits have to secure a certain income in retirement, no matter what the value of the pension plan is at the time at retirement. In many instances, there is not enough funds in the pension to pay this guaranteed income however, as stated earlier the Section 32 policy is bound to pay this set income. Consequently, in such instances, they are able to pay a reduced lump sum benefit, and in some instance none at all.
If you are not eligible for a lump sum pension of 25%, you may have the option to transfer to another private pension provider and into a personal pension. An IFA, or pension adviser, will offer guidance on such matters.