Ask the Experts: Should I take a ‘crystallised’ lump sum from my pension?

Published by Patrick Connolly on 09 August 2017.
Last updated on 09 August 2017

Question

I have just received my 2017 annual benefit statement from the Local Government Pension Scheme – my pension is payable from 9 August 2038. The pensions administrator included the following paragraph:

“There is also an option to convert some of your pension to retiring allowance at a ratio of £1 to £12, provided that the total lump sum does not exceed 25% of the value of the pension benefits being drawn (crystallised).” My pension benefits summary shows an annual pension before tax or other deductions of £9,494 and a lump sum of £15,892.

I just don’t understand what that paragraph means, particularly the word ‘crystallised’. Would it be beneficial to me?

From:
HA/Letchworth

Answer

You are fortunate to be a member of such a good quality pension scheme, which has guaranteed benefits that would be very expensive to match with a private pension.

Your pension will provide you with a guaranteed level of income. However, you also have the option to give up part of your pension income in exchange for receiving a one-off, tax-free lump sum. This is what the paragraph containing your quote is referring to.

If you decide to take a tax-free lump sum, for each £12 you receive your annual pension income will be reduced by £1. So, as a simple example, if your pension income was £100 each year and you decided to take a tax-free lump sum of £12, then your pension would be reduced to £99 each year.

There is a limit to how much tax-free cash you can take, which is determined by HM Revenue & Custom rules.

The word ‘crystallised’ just refers to when you start taking pension benefits. The amount which is crystallised is the amount of your pension used to start paying your pension income plus any amount used to pay you a tax-free lump sum..

Defined benefit pension schemes, such as yours, are valuable but also can be very complicated. The right decision for you will depend on your own personal circumstances. If you’re not sure what to do when it comes time to take your pension benefits, then you should take independent financial advice.

Patrick Connolly is a certified financial planner at Chase de Vere.

This article was written in response to a reader’s question. If you have a financial or work/career question that has left you scratching your head ask our panel of experts who will aim to shine some light on the matter.

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