"If I take a flexible lump sum, how am I taxed?"

Usually, 25% of each withdrawal will be tax-free and the remaining 75% will be taxable. This is known as an uncrystallised funds pension lump sum or UFPLS.

Note that you get a personal allowance (the standard is £12,570 in the current tax year) of tax-free income each year. Taking large cash sums could move you into a higher tax band and give you a large tax bill – especially if you have other income on top.

The lump sum you receive from us is likely to be quite a lot lower than the amount you take out of your pension savings. This is because:

• only 25% of each lump sum is tax free – you pay tax on the rest.
• if HM Revenue & Customs (HMRC) hasn’t given us your tax code for the current tax year, your lump sum will be taxed using a temporary (emergency) rate. In most cases this will mean that too much tax will be taken and you’ll have to reclaim the overpayment from HMRC.

For example: 

• Say you take £30,000 as a lump sum but you’re on an emergency rate of tax.
• £22,500 is taxable, meaning you pay £8,399.61 in tax.
• So you’d get £21,600.39.

The example uses UK rates and allowances for the current tax year.

Pension Wise can give you guidance on your options.