What can I do with my pension lump sum?

Introduction

As part of your retirement, you might be expecting a cash lump sum. Whether that’s from your NHS Pension or your personal pension pot, it’s an exciting way to receive your hard-earned cash.

How you choose to use your lump sum requires careful consideration, after all, you have retirement plans to fund.

In this article, we share some of the common ways retired medics choose to use their lump sum as well as some key tax and planning considerations.

What is a pension lump sum?

A pension lump sum is a one-off amount that can be taken from your pension pot from the age of 55 (rising to 57 in April 2028). Pensions typically allow up to 25% of the pension pot to be taken as a tax-free lump sum. All pensions are limited to the lower of 25% of the value or the Lump Sum Allowance (LSA), which currently sits at £268,275.

NHS Pension lump sums

How much you’re entitled to depends on which section(s) of the NHS Pension Scheme you’re a member of:

• 1995 Section: Members usually receive an automatic tax-free lump sum, calculated as three times the annual pension. They can then exchange pension to increase the lump sum up to the maximum of 25% of the capital value.
• 2008 Section and 2015 Scheme (CARE): There’s no automatic lump sum. However, members can give up part of their annual pension in exchange for up to 25% of the capital value limit.

If you joined the scheme before 2015, you may have service across more than one section, meaning your retirement benefits could include a mix of automatic and optional lump sums.

What can I do with my lump sum?

Although the lump sum itself is usually tax-free, how you use it may have tax consequences. Below we’ll share a few of your options. We always recommend talking to a Specialist Financial Adviser before making any big decisions.

Using ISAs to protect money from tax

If you’re not looking to spend your lump sum, you could put some of it into an Individual Savings Account (ISA). Interest, dividends and capital gains within an ISA are tax-free.

It’s worth noting that while you can hold multiple ISAs, your total contributions are capped at £20,000 per tax year.

For many senior doctors, a pension lump sum will exceed this, meaning only part of the money can be sheltered immediately. This is where careful planning and financial advice can come into play, helping you manage any additional lump sum you hold.

Investing your lump sum

If you can afford to put away some cash for a while, you might consider investing part of your lump sum. Investing could grow your money faster than cash savings, helping it to retain its value against inflation, and even create an additional income stream in retirement.

Just remember that investment returns are not guaranteed and you may get back less than you invest.

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.

Investing in retirement means you likely won’t have as long to ride out market lows, making low-risk investments a more attractive option.

On the flip side, if your lump sum is more of a bonus than an essential part of your retirement fund, a higher-risk portfolio with greater potential returns may be what you’re looking for.

Gifting to family

Many medical professionals choose to use part of their lump sum to support family members, whether that’s helping with a house deposit, education costs or a wedding.

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.

Treating yourself

If you’re all set in terms of your retirement fund, then there’s no harm in just enjoying the money you’ve worked so hard for.

Travel, hobbies and home improvements all form a fulfilling retirement. The key is to make sure any spending forms part of a sustainable long-term retirement plan.

When to get specialist advice

A pension lump sum can provide flexibility, security and opportunity in retirement, but you typically can’t reverse any decisions you make.

Speaking to a Specialist Financial Adviser will help you make the right decision for your retirement, fully tailored around your lifestyle, financial needs and retirement goals. Charges may apply.