Taking a tax-free lump sum when you retire
Overview
You can choose to exchange part of your pension for a tax-free lump sum. Make sure you understand the impact of reducing your pension and know the limits that apply.
As an LGPS member, you build up a pension that will increase in line with the cost of living for the rest of your life after you take it. You can exchange part of your pension for a tax-free lump sum that is paid when you take your benefits.
You can only choose to swap pension for lump sum when you first take your LGPS pension. You cannot change your decision later. It is important that you think carefully and make the right decision for you.
Your lump sum choice
When you take your pension benefits, you can choose to swap part of your pension for lump sum. For every £1 of annual pension you give up you will get a lump sum of £12.
If you were a member of the LGPS before 1 April 2008, you will have built up a lump sum. See the section on How your pension is worked out [1] for more information. Most members will still be able to give up part of their pension to increase their lump sum.
When you claim your pension, you have to tell us on your Retirement Claim form if you want to swap any of your pension for lump sum.
If you receive a pension estimate from your employer, or make a projection using the ‘Benefit calculator’ facility in your secure online ‘MyPension account’, you will be told:
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how much pension you have built up, and any automatic lump sum if you joined before 1 April 2008
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the maximum lump sum you can take
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the reduced pension you will receive every year if you choose the maximum lump sum.
You can choose to swap any amount of pension for lump sum, up to the maximum limit. If you elect to swap pension for lump sum, your pension will be reduced. Any survivor pension paid to your partner or eligible children will not be affected.
PLEASE NOTE: If you have an in-house AVC Fund, this will impact on the maximum amount of pension that can be converted to lump sum.
You may wish to seek financial advice before making your decision.
Once you have chosen what lump sum and pension to take, you cannot change your decision. You cannot elect to swap pension for lump sum once your pension is being paid to you.
How much lump sum?
HM Revenue and Customs limits the amount of tax-free lump sum you can take when your pension is paid to you. From 6 April 2024, the maximum lump sum is the lowest of:
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25% of the capital value of your benefits
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£268,275
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£268,275 less the total lump sums you have already taken.
If you have taken a serious ill health lump sum, a further limit will also apply. The maximum lump sum you can take is £1,073,100 less the serious ill health lump sum and any other pension lump sums you have already taken.
The Lifetime Allowance was removed from 6 April 2024. However, if you hold a valid Lifetime Allowance protection, you may be able to take a lump sum that is larger than £268,275.
Merseyside Pension Fund is obliged to pay a Guaranteed Minimum Pension and, in some cases, this may restrict the amount of pension that can be given up.
You can use the Lump sum calculator [2] to estimate:
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the maximum lump sum you could take
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the reduced pension that you would get with your chosen amount of lump sum
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if you have an AVC and want to take some or all of it as a lump sum, how that would affect your options.