Taking a lump sum rather than a small pension

Taking a lump sum rather than a small pension (called ‘Commuting’ a small pension)

If your total pension savings from all sources is £18,000 or less, you may be able to take the whole amount as a cash lump sum, with 25 per cent tax-free. It needs the agreement of the pension provider to permit commutation.

From your point of view it means that a small monthly or annual amount can be converted into a potentially more useful capital sum.

If you do decide to opt for the lump sum, the way in which it is taxed is unusual. It means that you are likely to pay too much tax at source when you receive the lump sum and so you may be entitled to claim a refund.

Further information on this subject can be found on the HMRC website at http://www.hmrc.gov.uk/incometax/overpaid-thro-pension.htm#5.

There is also more general information on trivial pension commutation on the DirectGov website at http://www.direct.gov.uk/en/Pensionsandret