Taking cash lump sums from your pension

How you can dip into your pension pot throughout your later years


Taking your pension in lump sums

You can start taking cash lump sums from your pension pot from the age of 55 as part of an early retirement.

Sometimes this approach is referred to as Partial UFPLS (Uncrystallised Funds Pension Lump Sum). This term just refers to flexible lump sums that you can take as and when you need them, without needing to fully crystallise (cash in) your pension pot.

You can take a total of 25% of your pension pot tax-free, with the remaining 75% subject to income tax. If you take your pot in several lump sums, then the first 25% of each lump sum is tax-free and you’ll be taxed on the rest.

Taking a lump sum could push you into a higher tax band, which is something to be aware of and factor into your retirement income planning.

Pros of taking cash lump sums

  • A flexible way to take your pension
  • You’re in control of your savings and how they’re invested
  • You can choose how much and when you need to take a lump sum
  • Keeping some of your pension savings invested means you could grow your savings and protect them from inflation
  • Up to 25% of each cash withdrawal is tax-free

Cons of taking cash lump sums

  • Your pension savings and value of your investments could fall or even run out
  • Your investments will need regular review and possibly advice
  • Your pension savings may not be enough to support your full retirement, depending on the performance of your funds and how long you live
  • Neither you nor your dependant will receive a regular income when you die
  • By taking a lump sum, you trigger the MPAA* which caps (£10k limit in 2024/2025) the amount you can continue to invest in a pension.

* Money Purchase Annual Allowance

Can I still add to my pension pot once I start taking lump sums?

If you still wish to contribute to your defined contribution pension after your first UFPLS withdrawal, the amount of savings that qualify for tax-relief each year is reduced from £60,000 to £10,000.

This is the current value of the Money Purchase Annual Allowance (MPAA). You’ll want to take this into account if you still wish to add to your pot after you’ve taken a lump sum, as this will greatly affect how much you can save.

Is this the right retirement option for me?

There’s no denying that taking cash lump sums is one of the more flexible retirement options, giving you control over your pension, savings and remaining investments.

For example, you can use a lump sum to fund your children’s weddings, pay for their house deposit, or do those home improvements you’ve always wanted to do – all without needing to make a long-term decision on your retirement plans.

It also gives you the opportunity to build your income further, as your pension stays invested for potential growth.

But with that freedom comes the responsibility of planning your income for the rest of your retirement. You’ll need to make sure you have enough to last your whole retirement, including extra costs later down the line, like paying for care for yourself or your partner.

Before you make a decision, you might want to take a look at our comparison table. This shows the various ways you can take your pension:

Annuities Taking your whole pot as cash Cash lump sums Drawdown
Provides a regular income?
Provides a secure income for life?
Allows you to change your income?
Is your remaining pot still invested?
Affected by the stock market?
Can it provide an income for a dependant?
Can I take my pension from age 55?

This table is an illustration of your possible pension options. The options available to you will depend on your individual circumstances, including the type of pension you have.

If you aren’t sure if taking cash lump sums is the right option for your retirement, you may want to speak to a Specialist Financial Adviser from Wesleyan Financial Services.

As specialist financial advisers, they can help you with everything from retirement and income planning, to discussing your pension options and conducting one-off or regular financial reviews.

You might be interested in…

Taking a guaranteed pension income

Looking for a stable income for your retirement? You can purchase a guaranteed income for life, otherwise known as an annuity, to give you some peace of mind during your later years. 

Taking a flexible pension income

Take income directly from your pension as and when you need it with flexi-access drawdown and enjoy the freedom of dipping into your pension pot.

Deferring your pension benefits

If you’ve reached retirement and don’t need to access your pension straight away, then it could pay to leave your pension pot untouched.