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The NHS Pension Scheme Tax Free Lump Sum Explained

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 lump sum will be tax free?

Generally, provided your lump sum is no more than 25% of your pension benefits or 25% of your lifetime allowance, whichever is lesser, any lump sum taken up to this level is tax free. Some members may be entitled to a higher figure.

What is the lifetime allowance?

This is a limit on the total value of pension benefits that may be accrued within all of your pension schemes, without incurring an extra tax charge. This is currently set at £1,073,100. As announced at the 2021 Budget, the lifetime allowance will be frozen at this level until April 2026.

Do I have to take a lump sum?

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. 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?

This varies from one medical professional to another, and depends on which section of the NHS Pension Scheme you are a member of:

1995 Section:

· The compulsory lump sum is typically three times your pension
· The maximum lump sum is approximately 5.36 times your pension

2008 Section:

· 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
· The maximum lump sum is approximately 4.28 times your pension

2015 Scheme:

· No compulsory lump sum
· The maximum lump sum is approximately 4.28 times your pension

In all three sections, the tax free amount is capped at 25% of the amount of lifetime allowance you have left at the time you draw your benefits, based either on the standard lifetime allowance or your protected lifetime allowance if you have previously arranged pension protection.

Should I take more than the compulsory amount as a lump sum?

This depends entirely on your personal circumstances, but there are factors that you should consider.

These include:

  • 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 mortgage to repay

While it may be appealing to clear your mortgage, it is worth considering whether the interest on your mortgage is higher than the income you would receive by keeping that money invested in your pension.

  • If you have a lifetime allowance issue

As mentioned above, it may be possible to take a larger lump sum by foregoing part of pension. For every £1 of pension you give up you will receive an additional £12 tax free lump sum. As the method of measuring the capital value of your pension against the lifetime allowance is (pension x 20) plus your lump sum, taking a larger lump sum will reduce the overall capital value. As a result, this will reduce the lifetime allowance tax payable.

Typically, most people would opt for a greater income, unless you have a reason not to. Your own health may be a factor. If it isn’t great, 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 in a NHS pension tax at your marginal rate of income tax when they are paid to you.

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.

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