I’m retiring in November. Should I use my £14,500 pension lump sum straight away?

A reader wants to know if taking out a lump sum from his pension before his retirement is a good idea or not

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David writes: I am turning 66 in July and will be retiring in November 2026. I have £14,500 in a private pension pot. I have also received a letter from the DWP to say I will be eligible for the full state pension. I’m considering taking out the lump sum of my pension before I retire – is this a good idea?

Alina Khan, The i Paper’s money coach reporter, responds… After reading your letter, and some back and forth emails exchanged, you told me you live alone and have no plans to earn extra income in retirement.

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You also said you want to use the lump sum to give some money to your children and go on a holiday.

In the UK, in most cases, you can access your defined contribution pension from the age of 55, and there are a few options of how you can take your pension.

You can choose to take some or all of your pension pot as a cash lump sum – no matter what size it is, buy an annuity – a product that converts your pot into a guaranteed regular income for the rest of your life – or take money directly from the pension fund and leave the rest invested, known as drawdown.

You can also do a mixture of all these options.

If you do decide to take a lump sum, 25 per cent of your total pension pot would be tax free, so in your case, £3,625.

Remember, however, that if you delay taking the lump sum, your pension pot could grow as it stays invested, and so you may eventually be able to take more than £3,625 tax free.

You said you want to use at least part of your pension for gifting money to your children, but Seán Standerwick, chartered financial planner at MLP Wealth, said before doing so, it is important to ensure you have enough money to fund retirement for the rest of your life.

“I understand we all want to help our children, but this only makes sense if you can afford to do so. It may seem a rather basic, but the most important thing is to ensure your incomes meet your expenses, or even better, they are higher,” he said.

The first thing to do is to go through your expenses and check there is no wastage and cancelling or cutting back on any that are not needed.

You explained that you live in a council flat and also pay single person council tax – your overall costs are below what the state pension provides.

Standerwick suggested also checking if the pension has any guarantees, like guaranteed annuity rates, as they could sway the decision as to whether you want to take the lump sum.

An annuity rate determines the amount you get each year if you turn your pension pot into an annuity – which as explained, is a fixed pension income for life.

The rate is based on things like your age, your health, where you live and current market rates.

A guaranteed annuity rate is one that was set out in the terms of conditions of the policy when you took it out and could be higher than rates that are available today. It may mean that taking a pension annuity is a better option than a lump sum for you.

Depending on your pension provider, the other option to consider is potentially accessing your pension “flexibly”, meaning you may be able to take your money using flexi-access drawdown.

This usually lets you take up to 25 per cent from your pension as a tax-free lump sum at any time from the age of 55 and then the rest is invested (put into drawdown).

You can then either take regular income from it or lump sums as and when you need.

However, it is important to note because the pension is being invested, the amount in your pension could rise or fall depending on market conditions.

If you put your pension into drawdown, you can either ask your provider to choose how your pension is invested, choose your own investment options or pay a financial adviser to manage your pension investments for you.

“This route would require management, ensuring the plan is invested suitably and the incomes drawn are sustainable,” Standerwick warned.

You can use a calculator online to see how long a regular drawdown or flexible retirement income might last you.

I wish you a lovely retirement.