What can I do with my pension lump sum?

As a soon-to-be-retired teacher, you might be in line to receive a lump sum from the Teachers’ Pension Scheme (TPS). Or you may be considering taking one from a personal pension pot.

Many of the teachers we advise are excited at the prospect of receiving a large amount of money when they leave the classroom - but are less sure of what to do with it.

In this guide, we’re going to look at what a lump sum is, whether you’ll receive one and how you might potentially use it.

What is a pension lump sum?

A pension lump sum is an amount of money that you can take from your pension at retirement. Most pensions have a lump sum option. If you have a private pension or a defined contribution pension, you will usually be able to take 25% of your pension pot tax-free, as a lump sum.

In the context of the Teachers’ Pension Scheme, the lump sum is separate from your pension and can be taken in its entirety, tax-free.

Teachers who are part of a final salary scheme, such as the 1/80^th or 1/60^th schemes, will usually receive an automatic lump sum upon retirement. You can request a bigger lump sum by reducing your pension.

Teachers who are part of the career average (CARE) scheme will need to apply for a lump sum, as you will not automatically receive one. If you started teaching prior to 2015, you will likely be part of both schemes.

Can I increase my lump sum?

Yes, if you are eligible to receive an automatic lump sum, you can increase the amount you take. However, you will need to give up some of your annual pension.

If you’re part of the CARE scheme, you can request to receive a lump sum, but you will also need to give up some of your pension.

For every £1 you give up from your annual pension amount, you will receive £12 towards your lump sum.

What can I do with my lump sum?

For most people, the receipt of a lump sum will be the single biggest amount of money they have ever had. While this might seem like an exciting prospect, it can also be a bit overwhelming. Especially if you’re not sure what to do with it.

You might already have plans for some of your cash, but what you do with the rest can often be a difficult balance, particularly if you don’t want to lose out on tax.

Your lump sum is tax-free of course, but what you do with it might not be. For example, if you decided to put some of your cash into a standard savings account, as a basic rate taxpayer, you would be taxed on any interest earned above £1,000.

Tax treatment depends on your individual circumstances and may be subject to change in the future.

It’s worth taking some time to consider tax planning for retirement and what your options might be to keep your cash working for you.

We’ve broken down a few of the more popular ways that retirees might choose to use their lump sum below.

Protect it from tax with an ISA

If you haven’t decided what to do with your money yet, or you know you want to save a bit, it may be worth adding some of it to your Individual Savings Account or ISA.

These types of account act as a tax-free wrapper to protect savings, interest and investments.

An adult in the UK can open as many ISAs as they want, but their total contributions cannot exceed £20,000 in the 2025/26 tax year. So, if you’ve still got some allowance left for this tax year, it may be worth using some of your lump sum to top it up.

Many of the teachers we advise receive a sum greater than this, so while some of your money may be protected from tax and gaining interest in an ISA, you may still have an amount that isn’t protected or working for you.

Consider an investment

If you want some of your money to continue working hard for you, investing a portion of it could be another good option to consider.

While there are no guarantees, investing could potentially help to grow your money faster than cash savings, helping it to retain its value against inflation, and even create an additional income stream in retirement.

Our investment calculator provides a useful illustration of how your money could grow in a range of market conditions, depending on how long you invest for.

As you’re at retirement, you have some specific considerations to make in relation to your risk appetite. Investing later in life gives you less time to ride out market lows, so you may want to consider a lower risk investment.  Funds, for example, with a higher proportion of bonds and other lower risk assets.

Equally, if the lump sum is something of a bonus for you, with a healthy annual pension already guaranteed, you may want to look to higher risk/reward options. Funds with a higher mix of shares, perhaps.  

If you’re new to investing, it can be hard to know what to look for and where to start. That’s where a Specialist Financial Adviser from Wesleyan Financial Services could help.

An Adviser can explain how investing works, discuss your goals and your appetite for risk to find the right type of investment for you. Charges may apply.

It's important to remember that any investment comes with risk. All investments can go down as well as up, and you may get back less than you invest.

Explore pension recycling

When you were working, any money that you put into your pension was probably given tax-relief. As a retiree, you could still benefit from saving on tax through pension recycling.

Recycling your pension is where you choose to use some of your pension income or lump sum to reinvest in the same pension or another scheme to potentially generate further tax relief.

As you might expect, this type of reinvestment comes with strict rules around its use. It might be worth meeting with a Specialist Financial Adviser from Wesleyan Financial Services if you are considering pension recycling.

Thinking about treating your family?

When you retire, you may want to enjoy your money by treating your family. It might be that you have a son or daughter buying their first home and you want to help with the deposit. Or you want to help to cover expenses for a wedding or university fees.

Whatever you want to help your family with financially, giving them money as a gift now could help to save on inheritance tax (IHT) in the future.

Giving money in this way is usually called a lifetime gift. Generally, three types of lifetime gift exist with strict rules around what you can give without incurring tax charges in the future.

• Exempt transfers

This includes gifts of any value between spouses, annual gifts of up to £3,000 per tax year, wedding or civil partnership gifts up to £5,000 to children, small gifts of up to £250 per person per year and gifts to charities or political parties).

• Potentially exempt transfers (PETs)

These are gifts which exceed the amounts for exempt transfers. IHT will need to be paid if you die within seven years of making the gift if the PET puts you over the nil rate band for tax.

• Chargeable lifetime transfers

These are gifts that are not made outright, for example gifts made into a flexible or discretionary trust.

Further information on lifetime gifts and the areas to consider for tax purposes are available in this guide.

Please bear in mind that advice in relation to Inheritance Tax planning is not regulated by the Financial Conduct Authority.

Spend it

While you won’t find much mention of it across wealth management guides, there is nothing wrong with spending some of your hard-earned cash.

So, if you’ve been dreaming of travelling the world or buying the car of your dreams, now could be the time to do it.

Retirement planning is about supporting you while you make these decisions, to ensure you have the money you need to enjoy your later years and get the retirement you want.

If you’re about to receive your lump sum and would like any advice or guidance, a Specialist Financial Adviser from Wesleyan Financial Services will be happy to help. They can provide advice and support tailored to your individual needs and circumstances. Charges may apply.