Are you thinking about taking the NHS Pension lump sum, or are you considering taking the bigger pension instead? We’ll explain the tax-free lump sum below.
Having the ability to take your NHS Pension as a cash lump sum is one of the most popular perks of saving in the scheme. With the money, you might choose to treat yourself, perhaps by taking a dream holiday or by clearing your debts, such as your mortgage. There is, however, another option; not to take your tax-free lump sum. Instead, you might exchange it for a higher income throughout your retirement. Choosing the right option for you starts with having a clear understanding of what your options are, and how these differ depending on which section of the NHS Pension Scheme you are a member of.
Here are some things you might want to consider:
Am I entitled to a tax-free lump sum from my NHS Pension?
Yes, every scheme member is entitled to a tax-free lump sum from their NHS Pension.
How much of my NHS Pension lump sum will be tax free?
Generally, provided your lump sum is no more than 25% of your pension benefits up to a maximum of £268,275, the amount is tax free. Some members may be entitled to a higher figure if they have previously applied for any of Enhanced, Primary, Fixed or Individual protection.
Do I have to take a lump sum from my NHS Pension?
If you are a member of the 1995 Section or you opted to transfer your 1995 Section benefits to the 2008 Section as part of the Choice exercise, you must take a compulsory lump sum from your NHS Pension. Otherwise, you are not obligated to take a lump sum if you are a member of the 2008 Section or the 2015 Scheme.
How much lump sum can I access from my NHS Pension?
This varies from one medical professional to another and depends on which section of the NHS Pension Scheme you are a member of. Below gives you an idea of the maximum amounts based on drawing the lump sum at the scheme’s normal retirement age up to a maximum of £268,275 and ignoring any protection:
- The compulsory lump sum is typically three times your pension
· The maximum lump sum is approximately 5.36 times your pension
- The compulsory lump sum (for members who opted to transfer their 1995 Section benefits to the 2008 Section as part of the Choice Exercise) is three times your pension, based on membership up to 31st March 2008
· Where there is no compulsory lump sum the maximum is approximately 4.28 times your pension
- No compulsory lump sum
· The maximum lump sum is approximately 4.28 times your pension
These maximums assume retirement at the scheme’s normal retirement date. A member can receive £12 of lump sum for every £1 of annual pension given up, up to a maximum of 25% of the capitalised pension benefits up to a maximum of £268,275. If you have previously arranged pension protection it may be possible to receive an amount greater than £268,275 depending on the conditions of the protection obtained.
Should I take more than the compulsory amount as a lump sum from my NHS Pension?
This depends entirely on your personal circumstances, but there are factors that you should consider.
- How much income you’ll need in retirement to maintain your standard of living
You wouldn’t want to leave yourself short and having to make sacrifices because you took too much lump sum.
- Whether or not you have a need for additional capital now or in retirement
You may require capital now or during retirement, this may be to clear a mortgage, clear other debt, provide extra security/emergency fund, make a large purchase etc.
The decision to take a lump sum needs to be made when benefits are first taken from the NHS pension scheme and can’t be revisited at a later date. It is therefore important to consider your need for capital now and throughout retirement, taking account of your other assets.
Typically, most people would opt for a greater income, unless you have a reason not to. Your own health may be a factor. Where life expectancy is impacted., you may prefer to take a bigger lump sum, which could be given to your children, for example, as in the event of your death the benefits paid to your surviving spouse, partner or dependants is based on the original pension, not the reduced one.
When will my NHS pension lump sum be paid?
You should receive your lump sum the day after you officially retire.
What happens to the rest of my pension?
Your pension payments are taxed at your marginal rate of income tax when they are paid to you and increase annually by CPI.
How can Chase de Vere Medical help?
Following a long career caring for others, your retirement should be a time when you are able to enjoy and live life to the full.
We can provide independent advice to help you to maximise your NHS Pension lump sum and retirement income to ensure you maintain the standard of living you’ve worked so hard to achieve and to help create greater opportunities for a more rewarding financial future.
Pensions are complex in terms of tax relief and the different options to access your funds where you have private pension arrangements too. However, we will help you to make informed choices and avoid costly mistakes.
Content correct at time of writing and is intended for general information only and should not be construed as advice.