One of the most common pension terms you may come across is the tax free lump sum. It sounds complicated, but the basics are straightforward.
When you access your pension, you are usually able to take up to 25 per cent of your pension savings as a lump sum that is free from income tax. This is sometimes referred to as the “pension commencement lump sum.”
The remaining 75 per cent of your pension stays invested or is withdrawn through other options, and this portion is subject to income tax at your own marginal rate.
The tax free lump sum is built into the rules of most defined contribution pensions. It provides flexibility when you reach retirement age, giving you the option to release a portion of your savings upfront without paying tax on it.
The 25 per cent allowance is based on the total value of your pension pot.
Only this portion is free from tax — the rest of your pension is treated as taxable income.
Pension values are not guaranteed and can go down as well as up.
Pension App does not provide advice, but we do make it easy to see the value of your pension with daily updates. This gives you clarity as you explore your future options.
The tax free lump sum is one of the most well known features of pensions, but it is just one piece of the bigger picture. Understanding the basics ensures you know what the term means when you see it.
With pensions, your capital is at risk.