Taking a tax-free lump sum

Many people choose to take part of their pension benefits as a lump sum rather than as annual income. This is known as ‘commutation’ and, under current tax rules, you can take a maximum of 25% of the value of your pension fund tax-free. If you decide to take this option, you’ll receive £12 of lump sum for every £1 of annual pension you give up.

While specific details of the amount you’ll be able to take as a lump sum will be provided just ahead of your retirement, it’s worth familiarising yourself with the general rules on lump sums – particularly as there are variations between the different sections of the NHS pension scheme.

1995 section

In the 1995 section, the tax-free lump sum is paid automatically. This means your total lump sum will be the combination of your automatic lump sum plus any optional tax-free lump sum you wish to take.

If you moved to the 2008 section following the ‘Choice’ exercise, you must still take the tax-free lump sum for service up to 31 March 2008. You can, however, also commute part of your 2008 pension to receive an additional lump sum.

2008 section and 2015 scheme

The option to take a tax-free lump sum in exchange for pension works in the same way for both the 2008 section and 2015 scheme – you can exchange £1 of annual pension for £12 of tax-free lump-sum up to a maximum of 25% of the value of your pension.

Taking a tax-free lump sum doesn’t affect your death benefits. Any pension payable to your dependants would still be based on the full value of your pension benefits.

Try our tax-free lump sum calculator

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