Many consumers who have smaller sized pension pots would ultimately like to withdraw their pension in one lump sum payment. This one lump payment can often come in quite handy for many consumers who are on the verge of embarking on their retirement years. They are able to pay off debt before retiring, fund a vacation, or even put some money in the bank for any future emergencies that may arise. However, there are rules that govern how the lump sum can be taken and under what conditions it is actually possible to do so.
In order for a consumer to take their pension pot as a lump sum, they must be at least 60 years of age. The qualification for taking the lump sum also depends on the size of the pension pot in that only smaller sized pots can be taken as a lump sum. A consumer may qualify if one of their pension pots is worth £2,000 or less. They may also qualify for the lump sum if the total of all of their pension pots equals £18,000 or less. If the pension pot is £2,000 or less there are some very specific rules that need to be followed in order to extract the funds as a onetime lump sum payment and these rules depend on the pension scheme used.
For those whose total of all pension pots equals £18,000 or less, the consumer may be able to take all of their pension pot contents as a lump sum. This can be done even if the consumer has started to take from one of their pensions. This kind of lump sum is referred to most often as a “trivial” lump sum, or a “trivial commutation”. There are guidelines by which consumers can take their payment as a lump sum under this scheme. First, the consumer has to remove all of their savings from each one of their pension pots, if more than one, within the same pension scheme as a lump sum. These cannot be broken out or paid out individually. They can be paid out separately only if they are from different pension schemes. Secondly, the consumer must have all of their pension pot savings valued on the same date, which is not to exceed three months out from the date they would take their lump sum. This is to ensure that the valuation is accurate and still within the guideline parameters.
If a lump sum is taken by the consumer instead of their small pension before they began to get that pension, only 75% of the lump sum is eligible to be taxed. However, if the consumer had already been getting payments from their pension and then decided to take the rest as a lump sum, the entire lump sum payment is eligible to be taxed. The amount of tax paid by the consumer will depend on their total income for the year.
In order for a consumer to take all of their pension pot as a lump sum, they should contact their pension scheme administrator to ensure that their scheme allows for a lump sum payment. Then the consumer will be able to have their pension pot(s) valued to ensure that they meet the criteria and eligibility for removing their pension contents in the form of a onetime lump sum payment. For many consumers, receiving the lump sum, if eligible, can be incredibly helpful when trying to fund retirement years. It can be used to pay off debt, fund a vacation, or be used to ensure that healthcare or long term care is in place.