Is a lump sum a good option for my pension?

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When your personal or workplace pension begins giving you an income, one option that usually becomes available is that of withdrawing a cash lump sum. The amount of this lump sum will depend on what type of pension yours is, but many allow you to draw as much as 25% from the pension pot without paying tax. In answer to the question, "is a lump sum a good option for my pension?", other options are available, including leaving money invested in your pension fund and withdrawing lump sums as and when you need to.

Lump sum or pension - which is better?

Not all pension companies are created equal, and not all will offer the lump sum option. So you will need to enquire with your provider as to whether it's actually possible if the lump sum is something you would like to pursue. Some pension providers or employers may only allow you to take one or two lump-sum payments per year, or apply a fee if you withdraw all your cash within a predetermined period of time.

If you move forward with the option of taking sums from your pension pot this way, the main considerations to keep in mind are your tax implications, and how liable you are to run out of money. Spreading your withdrawals out over a number of years can keep your tax bill at a minimum, and allow you to spread your tax-free entitlement over a period of several years.

You should consider taking lump sums if...

  • You don't want your pension to be exposed to investment risk
  • You prefer to receive different amounts of money each time
  • You want your 25% tax-free allowance to be spread over a long period
  • You have an emergency that needs a large sum of money
You should avoid taking lump sums if...
  • You want a guaranteed, consistent income for the rest of your life
  • You don't want to incur any fees
  • You want your money to remain invested, in order to benefit from growth
  • You don't want to transfer your pension to a different company (some companies don't offer the lump sum option)
  • You think your money could run out
Pension lump sums will be a good option for some, and a bad choice for others. If you are on the fence as to whether it's the right option for you, it might be time to seek the assistance of a financial adviser.

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The opinions expressed in this article do not constitute financial advice and independent advice should be sought where appropriate.

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