How to take out a pension lump sum securely

7 minutes

Pension savers can get their hands on a significant chunk of their pension pot without having to pay tax on it. But how can they make sure they do it securely, and what tax issues do they need to consider?

  • Want to take out a lump sum? It’s all about finding the right balance
  • Taking advantage of tax benefits can be a matter of timing
  • Withdrawing a lump sum could affect your inheritance tax

There's a lot to consider before taking your lump sum

How do you plan to use your pension pot? Not that long ago the options were fairly limited. But since the introduction of the pension freedoms a few years ago, savers now have far more say, and more choice, over how to use that money.

One aspect has remained constant: the ability to take a quarter of the pension pot in a lump sum, absolutely tax free. But is it a good idea? John Fitzsimons (@johnthejourno) takes a closer look.

How much do you really need to withdraw?

Jamie Smith-Thompson, managing director at advice firm Portafina, notes that the bigger a part your pension will play in meeting your basic retirement needs, the more serious the impact of taking out a pension lump sum will be.

‘We find that people who come to us for advice on taking lump sums early fall broadly into two camps: those who have a pressing need for money to solve a serious immediate problem that is causing them a lot of stress, and those who see an opportunity to use some money now for something they want to do, such as start a business or go on the holiday of a lifetime.’

No matter which camp you fall into, you’ll need to find the right balance: what can you afford to withdraw without overly impacting the regular income you’ll secure from the remainder of your pot.

Think carefully about income tax

The first 25% you withdraw from your pension in a lump sum is free of tax. But if you opt to withdraw more than that, as you are entitled to do, you need to bear in mind that sum will be subject to income tax at your marginal rate.

This can all be a matter of timing.

‘For someone retiring early at age 60 with no other income it would be sensible to withdraw £11,850 per year of income to utilise their personal allowance,’ explains Scott Gallacher, chartered financial planner at Rowley Turton.

‘But if they were a very high earner and they retired at Christmas, it might be a good idea to delay any income withdrawals until the new tax year to avoid incurring 40% or even 45% on those income withdrawals.’

Don’t forget inheritance tax

Income tax isn’t the only tax that you need to think about, as taking out a lump sum from your pension can also affect your inheritance tax liability too.

Scott points out that the money in a pension falls outside of inheritance tax, but that changes once it has been withdrawn.

‘For example, for a married couple in their early 60s with £1m in property and savings and a £400,000 pension pot, drawing the 25% tax free cash, which works out at £100,000, from their pension would increase their potential inheritance tax liability by £40,000,’ he explains.

Withdraw and reinvest

Some savers may be tempted to take a lump sum out of their pension pot and reinvest it elsewhere. This is understandable if you want to invest in an asset that you can’t traditionally keep within your pension wrapper, such as a buy-to-let property.

But it’s worth remembering that pensions are an incredibly tax efficient way to save, and by moving your money outside of the pension wrapper you are potentially exposing yourself to a far greater tax outlay.

As Jamie points out: ‘Pensions enjoy all sorts of tax breaks that are designed to encourage you to save for your future. And you can spread your investment risk widely while still remaining within a pension wrapper.’

Avoiding the scammers

The pension freedoms haven’t just given savers greater say over how their money is used. It has also been a boon for scammers, looking to sweet-talk the over-55s into moving their pension lump sum, or even the entire pension pot, into far more volatile – and, in some cases, outright fraudulent – schemes.

More than 250 people reported being the victims of pension scams in 2017, losing an average of £91,000 each, according to Action Fraud [1] , while the Financial Conduct Authority (FCA) reckons that 23% of adults experienced an unsolicited approach about pensions or investments that might be a scam between June 2017 and June 2018. [2]

If you want to avoid being caught out, be suspicious of any pension or investment offers you receive out of the blue, whether over the phone, by text message or by email. Read our article on
recognising and reacting to potential pension scams to stay safe.

Don’t allow anyone to rush you into making decisions about withdrawing any of your pension or reinvesting it. Instead, if you’re thinking about taking out a lump sum, work out the balance you’ll need to support yourself into your retirement.


[1] Action Fraud, 2018. Victims of pension fraudsters lost an average £91,000,

[2] Financial Conduct Authority, 2018. The financial lives of consumers across the UK, Key findings from the FCA’s Financial Lives Survey 2017,