Take your tax-free lump sum from your pension
How tax-free lump sums work, and what to think about before taking yours.
What is a tax-free lump sum?
You may have heard you can take 25% of your pension savings as a tax-free lump sum, but what does that actually mean?
You can usually take up to 25% as a one-off, tax-free payment, up to a maximum of £268,275. The rest of your savings stay in your pension, available for when you need it in the future. If the 25% you’re entitled to is more than £268,275, you can still take it, but you’ll pay tax on anything above this limit.
We’ll explain how this works with People’s Pension and what to consider before choosing this option.
How to take a tax-free lump sum with People's Pension
You can start taking your pension money from age 55 (57 from 2028).
It can be tempting to take it as soon as you’re able to, but it’s worth pausing to think about what’s right for you and your future income.
If you take more than your tax-free lump sum, there are other ways to access your pension. Find out more about the other ways to take your savings.
Should you take your tax-free lump sum now or later?
If you’re thinking of taking your tax-free lump sum now, it’s important to think about whether it’s the right choice for you. Taking it early can affect your finances in the future.
Things to consider before taking it now
- Do you need the money now? Your pension needs to support you throughout your retirement. Taking your money earlier than you need it could mean you run out of savings later on.
- Will taking your pension affect any benefits you receive? You could lose certain means-tested benefits, such as Universal Credit, because your pension savings count as income.
- Could your pension grow more if you leave it invested? Leaving your money invested for longer gives it more time to grow.
Reasons to wait
- Delaying taking your pension could help it grow. Leaving your money invested for longer gives it more chance to increase in value, compared with keeping it in a bank account. Keep in mind, your pension can go up and down in value over time like all investments do.
- Taking it early could reduce your future income. If you don’t need the money yet, withdrawing it now could leave you with less to rely on later.
- Peace of mind. If you wait, your tax-free lump sum stays available for when you need it. Many people find it reassuring to know it’s there for emergencies, or when unexpected costs crop up.
After taking your tax-free allowance, what should you do with the rest?
There are other ways you can take your remaining taxable income. Do your research and choose the option that works best for you.
Leave the rest in drawdown
If you have chosen our drawdown option, once you’ve taken your tax-free allowance, we’ll move some or all your pension savings into a flexi-access drawdown account. Once your money is in flexi-access drawdown, you could choose to take lump sum withdrawals (as and when you need it) or set up regular monthly payments. Any withdrawals will be taxable as income – like a salary.
Learn more about flexi-access drawdown and setting up a regular monthly income.
Once you’ve chosen this drawdown option, you could choose to leave it where it is. Your money stays invested, giving it the chance to grow. But remember, as with any investment, the value of your pension can go down as well as up.
You can continue contributing to your pension which is separate to the money in your flexi-access drawdown account. The savings in your pension can also be used for other retirement options based on your future income needs.
Other options for your pension savings
You can choose to buy an annuity using your pension savings, giving you a guaranteed taxable income for life. This could be an option if you still have money in your pension after taking your tax‑free lump sum or moving some of your money into flexi-access drawdown.
