SJP Your pension tax free lump sum

The tax free cash lump sum is often the first part of accessing a pension that many people will think about.

In many cases it offers an opportunity to achieve a financial or lifestyle goal that requires a larger lump sum of money, such as paying off a mortgage, holiday of a lifetime or a big purchase.

Calculating your pension lump sum

There are different rules used for calculating pension tax free cash lump sums depending on whether you have a Defined Contribution (DC) pension, or a Defined Benefit (DB) pension.

Generally, with DC pensions, you are eligible to take up to 25% of your pension as a lump sum, which is not subject to any tax. There may be some circumstances where the amount you receive is different, for example if you have a pension sharing order as part of a divorce settlement.

A DB pension scheme uses different calculations, which take into account your length of service with that employer and how much you were earning. This means you could receive more or less than 25%, and it depends on your own circumstances and the scheme rules. The scheme administrator would be able to confirm the amount.

Where should you keep your pension tax free lump sum?

Placing your tax free cash lump sum in a savings account, or cash ISA, can provide security and stability, but also means the value is very likely to become eroded by inflation.

Also think carefully about keeping all of your cash in one place; the Financial Services Compensation scheme limit to protect cash deposits if a bank fails is currently £85,000, or £170,000 for joint accounts, per bank, per account.

You may be able to take advantage of cash services that seek out a range of accounts to obtain the best rate for your money. Your St. James’s Place Partner can help provide you with more information on this.

Please note, this involves the referral to a service that is separate and distinct to those offered by St. James's Place. 

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Business, News , Investing
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6 Feb 2025
SJP Approved 05/04/2024