Pension lump sums
As well as drawdown and annuities, your options from age 55 (57 from 6 April 2028) include taking lump sum payments straight from your pension pot.
What are pension lump sums?
Pension lump sums can be taken directly from your pension fund. 25% of the lump sum is tax free and 75% is taxed as income. The rest of the fund remains invested in the pension pot. There is no limit on the proportion of your pension fund that you can withdraw as a lump sum.
Here is an example of an £8,000 lump sum being withdrawn from a £50,000 pension:
Lump sums are also known as uncrystallised funds pension lump sums or UFPLS.
Am I eligible to take a lump sum/UFPLS from my pension?
You can take an UFPLS from any part of your pension fund that you have not already put into drawdown unless you have no remaining lifetime allowance or hold certain forms of protection.
Why take a pension lump sum rather than just taking tax free cash?
By taking a pension lump sum and leaving the rest of your SIPP in the fund, you'll still have unused tax free cash to take in the future. This will allow you to spread the tax free benefit over different payments. You can take lump sums whenever you need them, and each payment will have a tax free element.
Remember that taking a lump sum out of your SIPP will deplete your fund, so you need to consider whether you'll have enough money leftover for the future.
You’ll also need to be aware that taking a pension lump sum from your SIPP reduces the amount you can continue to pay into it as you have flexibly accessed your SIPP. ‘Flexibly accessing’ your SIPP means, taking an income via ﬂexi-access drawdown, taking pension lump sums or buying a ﬂexible annuity.
Before you flexibly access your SIPP, you can contribute up to £40,000 annually. But after you ﬂexibly access your SIPP, the amount you can pay into a money purchase pension (such as your SIPP) drops to £4,000 a year.
There’s no limit on further contributions if you access your SIPP non-flexibly, i.e. by only taking a tax free lump sum, or taking an income from non-drawdown funds.
Tax on pension lump sums
25% of the lump sum is tax free and the rest is taxed as income. If you have other sources of taxable income it is possible that the lump sum might push you into a higher rate tax band and you may end up paying more tax on the withdrawal than you thought.
If you take a lump sum from your SIPP we will deduct tax. If this is the first withdrawal from your fund it is likely that an emergency tax code will be used. To find out more see the pensions and tax section.
I like the sound of UFPLS - how do I take a lump sum from my SIPP?
First, make sure you read our guide to accessing your pension. When you're satisfied that taking a lump sum is the right option for you, log in to your account online and select 'Manage my SIPP' from the 'My account' menu.
What are small lump sums?
Small lump sums can be taken from age 55 where you have a small pension pot of £10,000 or less. The whole pot must be withdrawn and it will taxed in the same way as an UFPLs with 25% tax free and the rest subject to income tax. Up to 3 pension pots can be treated as small lump sums.
The advantage of taking a small lump sum is that the withdrawal is not tested against the lifetime allowance – this could be important if you have already used the allowance or think that you might do so. Also, taking a small lump sum will not trigger the money purchase annual allowance, enabling you to make future contributions over £4,000 if you wish.
To take a small lump from your SIPP contact us and ask for a ‘Request for a small lump sum payment form’.