Tax Free Lump Sum

9th March 2012

Choosing an annuity is a major decision in any person’s life, as the plan that you choose will be your source of income for many years to come, but in some situations a person may prefer to spend their pension pot elsewhere and may have other plans, to compensate for this the Government allows all annuitants to take a certain amount of their pension pot tax free, as a lump sum, before they invest the rest of it into an annuity.

Am I eligible to take a tax free lump sum?

Anyone is eligible to take a tax free lump sum once they reach the set retirement age, which is currently set at 65. At this stage you are eligible to start looking around and choosing which annuity you would like to purchase, in addition to taking a percentage of your pension pot tax free. This decision must be made, however, by the age of 75.

How much am I allowed to take?

In general, as of 2006 you can take anywhere up to 25% of your pension pot as a lump sum before you choose to invest it as an annuity. You do not have to take the full 25% and some people choose just to take a portion of this, but this amount is the maximum that you are able to take before you must start to pay tax on your income.

What are some benefits of taking this?

When it comes to deciding how much of your annuity income you want to take as a tax free lump sum it’s important to consider what it is that you are planning to do with it. Many people choose to take a tax free lump sum and invest it elsewhere, perhaps in a market where there is the potential for higher return, but where there is also higher risk. This money could be put towards stocks or other long term investments aside from general annuity rates.

Other people may decide that they want to spend their annuity income in a different way, some people may plan to take a holiday or vacation and others may like to purchase a retirement property or pay off a mortgage. Once you have worked out what you need to use the money for, then you will be able to work out how much money you should take as a tax free lump sum.

« Back to article list.