If the total of all your pension funds is less than £18,000, you can take it all as a cash lump sum once you are 60. You will get 25 per cent of it tax free, but the rest is taxed as income. Taking all your pension as cash in this way is known as “trivial commutation”. You can read more about this on the TPAS website here.
If you have a money purchase scheme pension then you can take up to 25 per cent as a lump sum.
Most salary related pensions let you take a lump sum when you retire in return for a reduction in your annual pension. In other words you exchange ("commute") part of your pension for cash up front. Tax rules prevent this being more than 25% of the total value of your pension, using factors set by HMRC.
The key question is how much pension you should have to give up in return for your lump sum. This will depend on your age when you retire, and sometimes on your gender as men and women have different life expectancies. (It is at present legal to discriminate in this way.) It can be hard to make direct comparisons between schemes as the pension you are giving up may be different. For example if annual increases are generous, then you would expect a bigger lump sum for giving them up.
For every £1 of pension you give up at age 65 a lump sum of between £15 and £18 might be considered reasonable. If you are offered less than that you should consider if it is good value.
The question to ask is whether an actuary has worked out fair rates for your scheme. It is possible to work these out so the pension fund is not making a profit from people taking lump sums. This needs to be done every so often, and with people living longer then you should expect a better deal.
Some suggest that many schemes have not increased the value of their lump sums to reflect the value of pension given up in this time of longer life expectancy. If this is the case - and you have no reason to think that you do not have long to live - then it makes sense to think very hard before taking up the immediate attraction of a lump sum.
