Should you take a 25% lump sum from your pension fund?

If you’re approaching retirement, think twice before exercising your right to take 25% of your pension fund savings as a tax-free cash lump sum.

Two pensioners looking puzzled at a laptop
(Image credit: Getty Images)

If you're approaching retirement, think twice before exercising your right to take 25% of your pension fund savings as a tax-free cash lump sum.

If you're a member of a final-salary scheme, the tax-free lump sum available to you on retirement depends on a "commutation factor". This is the formula that determines how much cash you qualify for and, just as critically, how much annual pension income you'll forgo by taking the money. The higher the commutation factor your scheme offers, the more generous it is.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up
Explore More
David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.