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After all, it may be the largest single disbursement of money you will ever receive. Before you make an irrevocable decision about your future, take the time to understand what the options might mean to you and your family.
A lump-sum distribution is a one-time payment from your pension administrator. By taking a lump sum payment, you gain access to a large sum of money, which you can spend or invest as you see fit.
A pension payment annuity "is fixed occasionally COLA-indexed , so there is little flexibility in the payment scheme. But a year retirement probably faces some surprise expenses, possibly large. The lump sum, invested properly, offers flexibility to meet those needs and can be invested to provide regular income, too. Your decision may affect your children, as well.
Do you want to leave something to loved ones after your death? Once you and your spouse die, the pension payments might stop. On the other hand, with a lump-sum distribution, you could name a beneficiary to receive any money that is left after you and your spouse are gone. Income from pensions is taxable. However, if you roll over that lump sum into your IRA, you will have much more control over when you remove the funds and pay the income tax on them. It will allow you to take distributions according to your required minimum distribution RMD , which in many cases, would be lower than your planned pension payments.
If you want to minimize your taxes, rolling your pension into an IRA will allow you to plan when you take your distributions. Thus you can plan when and how much you want to pay in taxes. A regular pension payment is a set monthly payment payable to a retiree for life and, in some cases, for the life of a surviving spouse. Some pensions include cost-of-living adjustments COLA , meaning payments go up over time, usually indexed to inflation.
Some argue that the main feature people like about lump-sum payments—flexibility—is the very reason to avoid them. Sure, the money is there if you have a financial need. But it also invites overspending. With a pension check, it is harder to splurge on purchases you might later regret. A lump sum also requires careful asset management. Unless you are putting the money into ultra-conservative investments which probably will not keep pace with inflation , you are putting yourself at the mercy of the market.
Younger investors have time to ride the ups and downs, but folks in retirement usually do not have that luxury. And with a lump sum, there is no guarantee the money will last a lifetime. The remainder will be paid to you as a monthly income.
There is always some anxiety about whether the tax-free lump sum will be reduced or taken away from pensioners - with the fear that the government will want to recoup some of the money lost by allowing people to withdraw their cash tax-free. This usually reaches fever pitch around the time of the Budget, when people are speculating on how the government plans to raise money - and that it is plotting a 'raid on pensions'.
The current government has expressed no plans to reduce the pension tax-free lump sum, or change it. We do not know what future governments may do - but for now, you'll still be able to withdraw your money this way.
Financial Services Limited. Financial Services Limited is a wholly-owned subsidiary of Which? Limited and part of the Which? Money Compare is a trading name of Which? Money Compare content is hosted by Which? Limited on behalf of Which? Pension tax relief calculator Pension lump sum withdrawal tax calculator Pension drawdown calculator State pension eligibility calculator Pension calculator - how much will I have?
All 5 calculators. In this article. What is the pension tax-free lump sum? Can I withdraw my tax-free lump sum before age 55? Taking a lump sum from a defined contribution pension Taking a lump sum from a final salary pension What is an uncrystallised pension lump sum or UFPLS? How much tax will I pay on a lump sum? Should I take a lump sum?
Can I take my state pension as a lump sum? Pension lump sums: FAQ. Does taking a pension lump sum affect tax credits and benefits? But how it is assessed will depend on whether or not you've reached state pension age.
Do I have to record my tax-free pension lump sum on my tax return? Can I take my pension lump sum and still work? How does the pension lump sum and inheritance tax work? When you take a tax-free lump sum from your pension, you avoid paying income tax on it. Can I take a pension lump sum from multiple pension pots? Is the pension tax-free lump sum under threat, or will it be changed? Plan your finances. Use our pension calculators to build a financial picture for your retirement.
Pension tax relief calculator Pension tax calculator Income drawdown calculator.
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