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Rakhi Vasavada
Rakhi Vasavada, Financial Advisor
Category: Scots Law
Satisfied Customers: 4549
Experience:  Attorney and Financial Expert. Have specialization in Financial Laws.Practice experience of over 13 years
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Is it advisable to accept a lump sum to replace a pension given

Customer Question

Is it advisable to accept a lump sum to replace a pension given by b
Submitted: 3 years ago.
Category: Scots Law
Expert:  Rakhi Vasavada replied 3 years ago.
Dear Friend,

Hello and welcome. Thank you for providing an opportunity to assist you.

Generally it is advisable to take a lump sum as against pension but a lot more depend upon your personal circumstances.

Let me try and explain how should you take this decision based on your personal circumstances.

You can take a cash lump sum when you start to take an income from your pension. In general the lump sum is free of tax, so most people take the maximum allowed by HM Revenue & Customs. But you should consider carefully what makes most sense in your circumstances.

One major advantage of taking a cash lump sum is that you don’t need to pay any tax on it, up to a maximum of a quarter of your pension pot’s value.

You lose this tax advantage if you leave the money in your pension and convert it into a retirement income – for example, by buying an annuity.

Further, You need to consider the impact of taking a lump sum on your likely income in retirement. If you take a quarter of your pension pot up front, that leaves less money with which to buy yourself a retirement income product such as an annuity.

For example, a pension pot of £100,000 currently buys a fixed annuity worth around £500 a month. But if a quarter of the pot is removed as a lump sum, that monthly figure falls to £375.

However, even if an income drop like this would cause you difficulties, it still makes sense to take your full tax-free cash lump sum. You can then use it to buy a source of income such as a purchased life annuity, etc.

THE MOST IMPORTANT is that what you intend to do with your lump sum, if taken. If you are using that to reduce your debt, mortgage, and thereby save substantial interest savings, etc, then it is worth it. To sum up, it is IMPORTANT that it is not used up in unproductive places.

So, if you are fine with taking a tax advantage of lump sum being tax free money, if you DO NOT have any problems with your retirement income being lowered at later stage of your life OR if you have good productive use of your money than YES.. You can certainly go ahead taking the lump sum as against pension.

I am sure this would help.

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Warm Regards