Today we continue to explore the benefits of the NHS Pension Scheme on retirement and in particular the flexibility of the tax free lump sum.
There is a great deal of flexibility on how much tax free lump sum you can take. The main limiting factor is the HMRC rule that you cannot take more than 25% of the capitalised value of your pension (and all of your other pensions).
The Tax Free Lump Sum In The 1995 Section
Your normal, standard tax free lump sum is three times your annual pension (as explained in an earlier Learning Zone).
However you also have the option to commute more of your annual pension in return for a higher lump sum. You will receive an additional £12 of lump sum for every £1 of pension you give up.
In the vast majority of cases, the maximum tax free lump sum that you can take from the 1995 Section of the NHS Pension Scheme under current legislation is 5.36 times your annual pension.
For example a doctor with a standard pension of £35,000 and a standard lump sum of £105,000 could potentially take a maximum lump sum of:
5.36 x £35,000 = £187,600
Therefore the doctor's pension would be reduced by (£187,600-£105,000)/12 = £6,883, making their new pension £28,117.
The Tax Free Lump Sum In The 2008 Section
In the 2008 Section, there is no automatic tax free lump sum. However you are able to commute some of your pension for lump sum if you so wish.
In the vast majority of cases, the maximum tax free lump sum that you can take from the 2008 Section of the NHS Pension Scheme under current legislation is 4.28 times your annual pension.
In the 2008 Section you HAVE to give up pension in order to receive a retirement tax free lump sum. As in the 1995 Section, you have to give up £1 of pension for every £12 of lump sum that you take.