Can I take my entire small pension pot as a tax free lump sum and leave my final salary scheme untouched?

I have both a final salary pension, based on 1/55 of my final salary having worked 23 years for the firm (ie. a final salary of £55,000 would provide £23,000-a-year income in retirement), and a money purchase pension into which I am still contributing.

I am now 57 and decided not to take my final salary pension at 55 as I am still working.  Also the enhancements to my pension at 60, an uplift of 35 per cent after usual increments, made it worthwhile leaving the pension until I'm 60 when I hope to retire.

Ideally I would like to take all my final salary pension as an income rather than a reduced pension and cash.  Is there any way I could use my money purchase pension to cover the cash element I could have taken from the final salary pension.

This would mean taking more than 25 per cent, maybe the full value of the money purchase pension as tax-free cash but the value of this pension is less than 25 per cent of my total pension pot when I reach 60. S. Mills

Choices: This reader would prefer to leave her final salary pension untouched, but still wants a lump sum from her money purchase scheme.


Adam Uren, of This is Money, said: How you can proceed will depend on what pension arrangements there are at your place of work, and what connection, if any, there is between your final salary and money purchase pension pots.

Given your 23 years of service, your final salary scheme (defined benefits) will give you much better level of income than your money purchase scheme, and though it is attractive to take your 25 per cent lump sum from your final salary pot, it doesn't always work out as the most economical option.

Whether you can take all your entire lump sum from your money purchase (defined contribution) pot will depend on whether this is a separate pension scheme, or whether this pot is made up of additional voluntary contributions (AVCs) you make on top of your final salary scheme.


AVCs allow members of occupational pension schemes to save more for retirement, with any additional contributions made being kept in a money purchase pension pot (where the money is invested and used to buy an annuity/income drawdown product upon retirement).

Under HMRC rules, people who make AVCs on top of their defined benefit pension can take their lump sum from their AVCs pot and leave their final salary pension untouched, provided it does not exceed 25 per cent of the entire pension fund (which Mrs Mills says hers will not).

So if you have a final salary scheme with an equivalent value of £450,000, and a AVC pension pot worth £150,000, you should be able to take the entire AVC pot as a tax-free lump sum, as this would represent 25 per cent of the entire worth of the individual's pension savings (£600,000).

This also works if you are saving into two separate money purchase policies with different arrangements, but both operating under the same workplace pension scheme. You would be able to take a larger lump sum from one in order to convert the other into an annuity.


But if these two pots are not linked, then Mrs Mills would in all likelihood have to take two separate lump sums equivalent to a quarter of her total fund, or a 25 per cent lump sum from one, or no lump sum at all.

Danny Cox, head of advice at Hargreaves Lansdown, says: 'These rules normally apply to money purchase AVC schemes, not separate money purchase schemes.

'For many final salary schemes you had the option to pay  AVCs into a money purchase pot. This pot was connected to the final salary scheme although the benefits were money purchase not final salary.

'If she is a member of a money purchase pension scheme that is not an AVC to the final salary scheme (so entirely separate from the final salary scheme) it is unlikely she will have the option to take all the tax free cash from that pension scheme.

'She should check with her administrators. If she can, it's generally a good idea but lots of companies got wise to this and stopped her doing it.'


Take smaller pension pots tax free and leave final salary untouched

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