{"id":363968,"date":"2026-01-11T06:05:12","date_gmt":"2026-01-11T06:05:12","guid":{"rendered":"https:\/\/www.newsbeep.com\/uk\/363968\/"},"modified":"2026-01-11T06:05:12","modified_gmt":"2026-01-11T06:05:12","slug":"youve-withdrawn-your-pension-lump-sum-now-what","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/uk\/363968\/","title":{"rendered":"You\u2019ve withdrawn your pension lump sum \u2014 now what?"},"content":{"rendered":"

Unlock the Editor\u2019s Digest for free<\/p>\n

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.<\/p>\n

My friend has a beautiful new conservatory that she calls her \u201cpanic room\u201d. She had read too many stories before last November\u2019s Budget<\/a> about the chancellor scrapping pension tax-free lump sums or dramatically cutting them, so she cashed in hers and spent it.\u00a0<\/p>\n

A record 211,000 people withdrew tax-free pension money in the 2024-25 financial year \u2014 \u00a318.3bn of it. This was a 62 per cent jump on the previous year and anecdotal evidence suggests we\u2019ll see records broken again when the next set of numbers are published. <\/p>\n

If you\u2019re among those who took \u2014 or are still thinking of taking \u2014 your lump sum, what should you do with it?<\/p>\n

For many, this conundrum is part of a bigger problem \u2014\u00a0inheritance tax. Allowance freezes and the removal of the IHT-free status of pensions from next April mean the number of estates paying the tax will double from 31,500 in 2022-23 to 63,100 by\u00a02030, according to the Office for Budget Responsibility. <\/p>\n

The wealthy will suffer most because of the tapering of allowances for estates over \u00a32mn (which would start at \u00a32.6mn had this threshold risen with inflation). By our calculations, estates worth more than \u00a32.6mn will pay \u00a3305,000 extra in IHT because of allowance freezes. Many more will fall into this bracket once pension savings are included in probate calculations.\u00a0<\/p>\n

I have one client who finds this profoundly depressing. His strategy was built around leaving pensions as the last pot to draw on, hoping it would form a legacy for his children. He feels much of that legacy is being stolen.<\/p>\n

I say perhaps the chancellor has given him the impetus to live differently. My advice to anyone wanting to fight the tax grab is threefold: try to live long; live well; live generously.<\/p>\n

Recommended<\/p>\n

\"Person<\/a><\/p>\n

The longer you live, the more you\u2019ll spend, and the less you\u2019re likely to leave. Consider looking after yourself as an act of rebellion \u2014 what better motivation for a new year fitness campaign?<\/p>\n

Next, start turning left at the aircraft door. Consider the difference between first and economy as being partly offset by the 40 per cent IHT your estate will save by you spoiling yourself like this. (You could try premium economy if first class feels too extravagant.)<\/p>\n

Finally, start giving money earlier to loved ones. Watch them enjoying it.<\/p>\n

With those principles in mind, we can return to your tax-free lump sum. Living long, well and generously is a way of life, so spending that money could take time. What do you do meanwhile?<\/p>\n

You can feed the money into Isas at \u00a320,000 a year and consider premium bonds. In both cases, any gains are free of income tax and capital gains tax (CGT) but not IHT.\u00a0<\/p>\n

Buying gilts (government debt) is another alternative to interest-bearing deposit accounts. Older gilts pay very low coupons \u2014 or interest \u2014 taxed at your marginal income tax rate. To compensate, these trade below par \u2014 the amount they\u2019ll return on maturity. That element of reward from the cost to par is tax-free.<\/p>\n

You could take advice on investing via an offshore bond. You can usually take 5 per cent of the original premium each year as a return of capital with no tax to pay. Ultimately, growth is subject to income tax rather than CGT \u2014 but only when the bond matures or is surrendered. You\u2019re in control of that, so it\u2019s a useful tax deferral tool.\u00a0<\/p>\n

Consider helping working children and grandchildren put part of their salary into their pension by replacing the income they forgo in doing so. If they qualify, they\u2019ll get tax relief at their marginal rate of tax on contributions. The gift may enable them to avoid paying 40 per cent tax or even the ridiculous 60 per cent marginal tax rate that kicks in between \u00a3100,000 and \u00a3125,140, when you lose \u00a31 of your tax-free personal allowance for every \u00a32 earned. For non-working grandchildren, you can contribute a maximum of \u00a33,600 gross per year; done annually and with the power of compounding returns, even this can build a worthwhile pension.<\/p>\n

If you\u2019ve withdrawn the maximum \u00a3268,275, you may be tempted to buy a holiday home. If you put it in your children\u2019s names and survive seven years it may be outside your estate on death. But you\u2019ll have to pay market rent to use it to preserve the IHT benefits. Put it in joint names with your children, meet your share of the running costs and you\u2019ll still have some IHT liability, but you should avoid the complicated IHT rules that scupper a gift where the donor retains a benefit. It could be something all the family enjoy now and a legacy for later.<\/p>\n

In short, mitigating the tax squeezes on your income and estate is complicated, but planning can help and you do have options. Much of it starts with changing the way you think about savings and legacy.<\/p>\n

My friend loves her new conservatory. Buying it was induced by tax panic, but the chancellor probably improved her quality of life. In time, you could find she has improved yours, too.<\/p>\n

Clare Munro is senior tax adviser at Weatherbys Private Bank<\/p>\n","protected":false},"excerpt":{"rendered":"Unlock the Editor\u2019s Digest for free Roula Khalaf, Editor of the FT, selects her favourite stories in this…\n","protected":false},"author":2,"featured_media":363969,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[84,4176,4174,4175,56,54,55],"class_list":{"0":"post-363968","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-personal-finance","8":"tag-business","9":"tag-finance","10":"tag-personal-finance","11":"tag-personalfinance","12":"tag-uk","13":"tag-united-kingdom","14":"tag-unitedkingdom"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/posts\/363968","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/comments?post=363968"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/posts\/363968\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/media\/363969"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/media?parent=363968"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/categories?post=363968"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/uk\/wp-json\/wp\/v2\/tags?post=363968"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}