Pension lump sums – the keystone of retirement income
Pension lump sums can be taken on day 1 of your retirement, when cashing in your pension pot to purchase an annuity, or set up an income drawdown arrangement.
By taking pension lump sums, pension savers are able to draw up to 25% of their pension savings tax-free, to spend or invest as they wish, at the beginning of retirement.
Pensions lump sums are tax-free only provided they do not exceed 25% of the ‘lifetime allowance’ for the tax year in which they are taken. For 2010/11, the lifetime allowance is £1.8 million, so that the maximum tax-free pension lump sum would be £450,000. For those whose total pension savings exceed the lifetime allowance of £1.8m, the excess can be taken as a cash lump sum taxed at 55%. Tax rules on pensions lump sums are complex and quality pension advice is recommended in dealing with such issues.
Calculating pension lump sums
Pension savers who plan the beginning of their retirement based on pension lump sums can be disappointed, if their pension savings fail to deliver the amount they expect. Our expert advisers can tell you how much you need to be saving today, in order to achieve the correct level of pension savings that will deliver the pension lump sum you need.
You can also do some preliminary calculations yourself, using the Principle First website. Calculating your pension saving and working out your projected pension lump sum is simple, using Principle First’s online pension planner.
The pension calculator can show, for example, the scenario for a woman aged 30, setting up her pension plan today, and wishing to retire at 60 on an annual pension income of £10,000.
This would require her to save £204.92 per month as of now, consisting of a contribution from her salary of £163.94 topped up by tax relief at the basic rate of 20%. Saving this amount on a monthly basis would achieve a pension fund of £250,000.
The woman could therefore expect, when she reaches 60, to have a pension lump sum of 25% of that, or £62,500.
Are you interested in calculating how much you need to be saving into your pension, and see your possible pension lump sum? Use our pension planner, make a pension advice enquiry or ring freephone 0800 678 5929 now.
Other options for pension cash release are also possible. With smaller pensions you may be able to take your whole pension pot as a pensions lump sum – although only 25% of it will be tax-free. In the 2010/11 tax year, your total pension savings must be £18,000 or less, equivalent to 1% of the £1.8m lifetime allowance, to qualify to be taken as a single pension lump sum. Of this, 25% or £4,500 will be tax-free.
While it is possible to postpone taking your pension, it is important to note that pension lump sums are available only to those who cash in their pension before the age of 75. For those taking their pensions at 75 or older, pension lump sums are no longer available.
