Retirement Planning information from Barclays Stockbrokers - How pensions work
How pensions work

How pensions work

Pension commencement lump sum 

A pension commencement lump sum is the amount of money you can take out of the fund you’ve saved, when you retire – anytime after the age of 55. You can take up to a quarter of your fund in this way. At the moment you don’t have to pay tax on this money, so it’s referred to as a tax-free lump sum.

Whilst there is an obvious benefit to receiving a tax-free lump sum, especially since all other income drawn for your pension is subject to Income Tax, withdrawing this money reduces the fund available to provide that ongoing income in retirement. That’s unless you buy an annuity with your pension fund, which can be treated more favourably from a tax point of view.

Right now the rules are as follows:

Defined contribution individual schemes

Defined contribution individual schemes – also known as money purchase schemes – include SIPPs​ and personal pensions. If you’ve got such a plan, you can take a maximum tax-free lump sum of 25% of the total value of your pension fund – but only up to a maximum of 25% of your Lifetime Allowance at that time.

Defined benefit and defined contribution occupational schemes

The rules are slightly different for occupational schemes. If you’ve got a defined benefit or defined contribution scheme, you can take a maximum lump sum of 25% of the value of your benefits, rather than an accumulated pension fund.

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