(also referred to as Pension Commencement Lump Sum)

You are usually permitted to take up to 25% of your pension fund at the start of your retirement as a tax free lump sum. This is known as the Pension Commencement Lump Sum (PCLS).

However, under new rules following the March 2014 budget, if your pension pots across all your arrangements total £30,000 or less, you can take the whole of it as a lump sum, from age 60. This has increased from £18,000. Pots of up to £10,000 each can also be taken as a lump sum (up to three such pots). This is known as ‘trivial commutation’.

If you do choose to take your entire pension pot or pots as a lump sum, this will not increase your tax-free entitlement. Therefore your tax-free entitlement will remain at 25%.

Many people find this a useful option, and a great way to start their retirement. However, it is important to note that you don’t have to take the 25%, you can take less or none – it purely depends on your personal circumstances. The more you take as your PCLS, the less of your pension fund there will be to generate an income for you.

Key points to consider

  • The size of your overall pension pot, and whether reducing it by 25% or any lesser amount limits the options available for you to take out a particular annuity
  • The fact that taking a lump sum will of course reduce the amount of annuity income you receive from the remaining funds
  • Any outstanding debts or mortgage you might consider clearing with this money, and any other options you might have to clear them
  • What level of savings you currently have available as cash and what kind of interest rate you could secure by placing the money in a bank or building society account
  • Whether you are likely to need to make any large purchases in the near future – for instance a new car, or repairs to your home which will need a large amount of capital.