How to Get a Pension Lump Sum Payment
To begin with, we should differentiate between the state pension and private alternatives. The state pension is the amount of money almost every worker will receive from the Government at retirement. The only two conditions for receiving this pension are that you have:
- worked for at least 10 years prior to retirement, and
- contributed to pension insurance during that time.
A private pension is one that has been established by yourself or another party separate from what you will be paid by the Government. Examples of private pensions include workplace pension schemes and self-invested personal pensions (SIPPs). The lump sum pension rules are nearly identical for all private pensions.
Lump Sums from State Pensions
Unlike a private pension, your state pension is not an amount of money that has been set aside and invested on your behalf. The money used to make the monthly payments comes out of the Government's general fund. Therefore, getting a state pension lump sum differs from how you would approach a lump sum from a private pension.
The current age for retirement in the UK is 65 for men and 60 for women. That age will be slowly graduated over the course of the next 15 years or so. At any rate, you have the option of immediately collecting your state pension in the year you retire or delaying those payments for later access. You will receive a lump sum from your state pension by delaying your payments for at least five months.
How to defer your State Pension
You don’t have to do anything to defer your State Pension - it will automatically defer until you claim it.
If you get benefits and you want to defer your State Pension, you must tell the Pension Service.
What you’ll get
You may get extra State Pension if you defer your claim. How much you can get depends on when you reach State Pension age.
You can’t get extra State Pension if you get certain benefits.
If you reach State Pension age on or after 6 April 2016
If you reach State Pension age on or after 6 April 2016 your new State Pension will increase by 1% for every 9 weeks you put off claiming. This works out as just under 5.8% for every full year.
If you reached State Pension age before 6 April 2016
You can take your extra State Pension as either:
- higher weekly payments
- a one-off lump sum
You have 3 months after you make your claim to decide how you want to take your extra State Pension.
Higher weekly payments
You can get higher weekly State Pension payments if you defer for at least 5 weeks.
Your State Pension will increase by 1% for every 5 weeks you put off claiming. This is the same as 10.4% for every full year you put off claiming.
You get the full State Pension of £119.30 a week.
Your basic State Pension will be £6,203.60 a year.
By deferring for a year, you’ll get an extra £645 a year (£12.40 extra a week).
After you claim, your extra State Pension will usually increase every year with inflation (based on the Consumer Price Index).
Lump sum payment
You can choose to get a one-off lump sum payment if you put off claiming your State Pension for at least 12 months in a row. This will include interest of 2% above the Bank of England base rate.
Your extra State Pension counts as income - you may have to pay tax on it.
There are different rules for lump sum payments on state pensions, depending on when a pension was born. We will not go through all of them here, but we will give you one example. Let us assume you are a man who will reach retirement age prior to April 6, 2016. You will be able to delay pension payments for a minimum of five weeks. You will earn an additional 1% for every five weeks you delay; you can earn 10.4% more by delaying for a full year.
At the point you begin receiving state pension payments, you will also receive a lump sum for the entire delayed amount. Assuming you delayed for 12 months, your first payment would include the entire accrued 12-month sum along with your first monthly payment to be received thereafter.
Lump Sums from Private Pensions
How you would receive a pension lump sum payment from a private scheme depends on what kind of scheme it is. In the UK, you have two primary options: a defined benefit scheme and a defined contribution scheme. A defined benefit scheme promises a total amount of retirement income irrespective of the amount of your contributions and the performance of your investments. Thus, you have a defined benefit.
A defined contribution scheme stipulates a certain amount of money you will contribute every month. In many cases, employers also contribute a certain amount as well. Your eventual payout relies exclusively on how well your investments do. A strong performance will increase your payouts and vice versa.
Here is how to get a pension lump sum payment from these two types of schemes:
- Defined Benefit – A defined benefit scheme may offer a monthly pension and a lump sum that are considered separate. In such a case, the rules of your scheme may require you to take both at the same time. If they are separate, the rules already define how you must take your payments. Getting a lump sum is as easy as contacting your pension administrator and filling out the appropriate paperwork.
- Defined Contribution – The defined contribution scheme gives you a lot more control over your pension funds beginning at age 55. With a defined contribution scheme, you can take lump sum withdrawals of varying amounts over many years. You could take the entire pot all at once, or you could take a series of lump sums under a flexible or capped drawdown contract.
In both cases, the way to go about it is to contact your pension administrator. Please bear in mind that what we have told you here constitutes only the general guidelines for lump sum payments. Your particular pension may have some unique rules attached to it that are not included here. Also, be aware that there are tax implications for taking lump sum payments.
Lump Sum Payments Are Income
For the purposes of taxation, the Government views pension lump sum payments as a form of income. That means you will have to declare it as part of your income in whatever year you receive it. Taking a lump sum in 2015 would mean the money is included in your total 2015 income. Taxes are assessed on that basis.
You are allowed under the law to take the first 25% of any pension pot as a tax-free lump sum. Any withdrawals above and beyond that amount is taxed at your marginal rate. However, the marginal rate is applied to your entire annual income, not just the lump sum payment. This means that any lump sum could push you into a higher tax band when combined with your other income.
Taxation is something that needs to be considered before you withdraw any money from the pension pot. If the pension lump sum tax in any given year is higher because you've been pushed into the next tax band, you might be better off taking either a smaller sum or delaying your withdrawal altogether.
Lump Sums Prior to Age 55
We have warned about taking lump sums prior to age 55 on other pages of our site. However, the warning bears repeating before we conclude this article. Consumers need to be aware that there are only a few exceptions to the law prohibiting pension lump sum access prior to age 55. Those exceptions include forced retirement due to ill health, a chronic health condition limiting life expectancy to less than one year, and participation in an exempted pension plan offered prior to 2006.
Outside of these three exceptions, attempting to take a lump sum payment from your pension will result in a minimum tax bill of 55%. Should you fail to tell the Government of your payment, or you deliberately try to hide it, you could be taxed as much as 70%. The excessive taxation makes such withdrawals hardly worth taking.
There is lots of flexibility with private pensions now that the Government has revamped pension rules. Those options include the opportunity to take a lump sum payment at any time after age 55. If you are thinking of taking a payment yourself, contact your pension administrator to determine what type of pension scheme you are operating under. The administrator should also be able to outline any special rules that apply to your scheme.
Where the state pension is concerned, it may be to your advantage to delay receiving pension payments in order to get a pension lump sum payment worth more in the future. A certified financial advisor can help you work out a payment schedule best suited to your circumstances. As always, be careful to know and understand all of the applicable information when trying to reach a decision.
How to Get Free Expert Advice
Our panel of carefully selected FCA regulated pension and investment experts offer visitors to this site a free confidential one to one consultation on any aspect of pensions or investments. The consultation allows visitors to question an expert on any issue and get free professional advice tailored to their exact requirements.
Should you decide to act on the expert advice or take up any of the services they may recommend you will be informed of all costs that would be incurred before you commit to proceed with anything.
To get the free professional advice you need just call our friendly team at our UK 24/7 call centre to book your no obligation one to one consultation with an expert on the number provided below.
Our panel of FCA Approved Pension Experts Will Help You:
- Free Initial Assessment of Your Current Pension Funds
- Find Out Your Projected Retirement Income
- Understand The Most Appropriate Alternative Investments
- Find Out How The Latest Pension Changes Affect You
- Release Cash From Your Pension
- Discover The Benefits of Changing Pension Providers