Lump sum flexibility

Post by **freespeech** » 24 Jul 2020, 09:25

How flexible is section C in regard to adjusting the lump sum and pension payments when taking your pension early? Providing you remain within the 25% tax free limit could I say I want £20k lump sum and the associated pension or £30k or £40k etc. Can you request anything within the limit or are there defined points that are the only options?

Post by **RobertT** » 24 Jul 2020, 13:45

You can take a lump sum worth anything from 0% to 25%, I think the forms give you 3 options:

1. No lump sum and maximum pension.
2. Maximum 25% lump sum and minimum pension.
3. Something in between of your choosing.

I don't think there's a set commutation rate for exchanging pension to lump sum, I think it can vary depending on age and other factors?
But if you use a ratio of 1:20 you should be in the right ballpark.

Post by **NorthernBoy** » 24 Jul 2020, 15:11

I don't think there's a set commutation rate for exchanging pension to lump sum, I think it can vary depending on age and other factors?
But if you use a ratio of 1:20 you should be in the right ballpark.

Yes, the 1 to 20 commutation rate is useful as a guide when converting pension to lump sum. As always there is no hard and fast rule as to how much lump sum you should take, as everyone’s circumstances are different.

Personally I am planning on taking the maximum and using the money to boost my income until state pension age.

Post by **freespeech** » 24 Jul 2020, 16:13

RobertT wrote:You can take a lump sum worth anything from 0% to 25%, I think the forms give you 3 options:

1. No lump sum and maximum pension.
2. Maximum 25% lump sum and minimum pension.
3. Something in between of your choosing.

I don't think there's a set commutation rate for exchanging pension to lump sum, I think it can vary depending on age and other factors?
But if you use a ratio of 1:20 you should be in the right ballpark.

Am I right in thinking that the best option to maximise income will always be to take the max lump sum? By doing this you would earn interest off that sum and your tax liability for the pension would be reduced too (assuming it was above your personal allowance). Given the 25% is tax free anyone that has a smaller lump sum to maximise pension and pays tax would be overall worse off. You could use the LS to subsidise the pension back up to the amount you would have had but without paying tax.

Post by **RobertT** » 24 Jul 2020, 16:48

freespeech wrote:Am I right in thinking that the best option to maximise income will always be to take the max lump sum?

Not always, as it depends how long you want to maximise your income for.

By doing this you would earn interest off that sum and your tax liability for the pension would be reduced too (assuming it was above your personal allowance).

Yes you'd be reducing the tax liability if above the PTA, but where are you going to get returns every year that equal the compounded index linked returns for the rest of your life you get from the pension?
Your savings will only compound properly if you don't spend them, so what's the point?

By interest I assume you mean via the bank or building society? Compare their rates with the rate of inflation.

Given the 25% is tax free anyone that has a smaller lump sum to maximise pension and pays tax would be overall worse off. You could use the LS to subsidise the pension back up to the amount you would have had but without paying tax.

Many people on this forum are planning on doing that up to state pension age.

But in practice plenty of others will take the max lump sum, and then just see the £££'s and go on a spending spree, and be happy to do that. Which is their choice.

There's not really a right or wrong because everyone's circumstances are different.