If you need a lump sum, should you take it from your pension?

Hi. I’m Chris Allen, Financial Education Manager at Aviva.

Currently, if you’re 55 or over you can usually access your pension savings if you need to. But it’s a big decision, so let’s look at some things to think about before taking the leap.

Your savings need to last

Taking out too much too soon reduces what you get later on. It could even mean your pension pot runs out while you still need income from it.

Think about tax

25% of your pension is usually available tax-free, but the rest is taxable as income. Taking out a lump sum could mean paying a lot more tax than you expect, possibly at a higher rate than you normally pay, depending on your overall income. But there are ways to help keep this to a minimum. 

Think about how much you really need to take. You could limit any lump sum to your 25% tax-free entitlement from any part of a pension you use.

You’ve got choices with the rest, including buying an annuity – a guaranteed income for life – and what’s called flexi-access drawdown where you don’t need to use all or any of the taxable money straight away.

In drawdown it remains invested so its value can go down as well as up and you could get back less than was put in.

Check with your provider if these options are available. You might need to transfer to a more flexible pension. And, if you’re still paying into a pension…

There’s a limit on how much you can pay into your pensions and still get the benefit of tax relief. And this could plummet once you've taken money out.

There are ways to avoid this, for example only taking the tax-free part, or limiting yourself to taking the full value of any pensions worth less than £10,000 as what’s known as a ‘small lump sum payment’.

So, should you access your pension? It’s a complex field with many options, so get help making your decision.

Chat with your provider, or speak to a financial adviser who can recommend the best thing to do. They may charge for advice, but there’s usually a few ways to pay, including from your pension pot.

You can also use Pension Wise from MoneyHelper, a free, government service offering clear, impartial guidance on your options.

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