Pension Lump Sums
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Another way the government offers us incentives to take out pensions is by allowing a lump sum pension payment to be made. As stated on the previous page, the finer details depend upon your individual pension plan. The government does allow up to 25% of your total fund to be withdrawn as a tax free lump sum. If you are very lucky, you should note that this tax free allowance only applies to the first £1.6million you withdraw!
It is useful to note that pensions are not subjected to capital gains tax, which is handy, specifically in the case of pensions which are linked to the stock market .
If your pension fund (in all pensions) is below £17,500 (2009/10) you may be able to withdraw the whole amount under the trivial commutation rule. It is important to note that this is ALL the pensions you hold added together, so, for example, if you had a small pension fund of £4,000 and another of £19,000 you would not be able to withdraw the £4,000 in one withdrawal as the total of the two pensions is £23,000 and so above the threshold. Trivial commutation of a pension fund IS liable to tax, however, 25% of the total is tax free in line with the rules as above.
If you are taking a tax free lump sum, or have the option of a trivial commutation, you should note that the rules apply at the time of retirement, so the decisions should be made just before you retire. Once your pension is being paid to you, any changes may change the taxation rules.
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