Retirement - frequently asked questions

A: The maximum amount of tax-free lump sum that can be taken from a retirement annuity contract is 25% of the value of the plan. It is not possible for individuals to protect any entitlement to more than 25% tax-free lump sum they had before 6 April 2006 (A-Day).

A: Individuals who didn't opt for transitional protection but who had the right to more than 25% of their benefits value at 5 April 2006 as a tax-free cash lump are still able to have the higher percentage paid when they crystallise their  benefits. They didn't have to register this unless they were also applying for primary or enhanced protection. The higher tax-free lump sum amount is based on the amount of tax-free lump sum at 6 April 2006 (A-Day) increased by 20% until such time as the lifetime allowance is greater than £1.8m when it will be indexed in line with the increases to the lifetime allowance.

Individuals must become entitled to all of their pension and lump sum rights (that were not in payment on 5 April 2006) under the scheme on the same day.

PTM63130: scheme-specific lump sum protection - overview

A: Under all of the following types of ill health the Trustees of the scheme will need to obtain medical evidence that proves that the individual is incapable of carrying out their job because of physical or mental impairment.

  • Ill-health
    It's possible for individuals to take their benefits before age 55 in the case of ill-health.

    The scheme administrator has medical evidence that the individual is, and will continue to be, medically incapable (either physically or mentally) of continuing their current occupation as a result of injury, sickness, disease or disability, and as a result of the ill-health the individual ceases to carry on that occupation.

    The normal tax-free cash rules apply to the benefits paid.

    The annual allowance applies in the year benefits are taken.

  • Severe ill-health
    It's possible for individuals to take their benefits before age 55 in the case of severe ill-health.

    The individual is unlikely to be able to do any type of gainful work, other than in an insignificant way, before state pension age.

    The normal tax-free lump sum rules apply to the benefits paid.

    The annual allowance does NOT apply in the year they are taken.

  • Serious ill-health
    It's possible for individuals to take their benefits as a lump sum before age 55 on the grounds of serious ill health.

    Before this can be done the trustees will need to obtain medical evidence that the individual's life expectancy is less than 1 year. The amount of the benefits will be tested against the lifetime allowance and benefits in excess will be liable to the lifetime allowance charge of 55% as it is a lump sum.

    All uncrystallised benefits must be taken.

    If the individual is under age 75 it will be paid tax-free. If the they are 75 or over the benefits will be taxed at their marginal rate of tax.

    The annual allowance does NOT apply in the year they are taken.

In all of the above cases restrictions apply to Guaranteed Minimum Pension benefits.

PTM051200 - when the annual allowance charge does not apply

PTM062100 - Early payment of benefits on health grounds

PTM063400 - lump sums: serious ill-health lump sum

A: The normal rules for taking benefits on any of the ill-health basis still apply but there are different rules apply depending on the type of contracted out benefits.

Section 9(2B) rights, also known as Reference Test Scheme benefits, can be taken early on the grounds ill-health. A tax-free cash lump sum can be paid as normal.

Guaranteed Minimum Pension benefits can only be taken on the grounds ill-health if the revalued GMP at age 65 for men and at age 60 for women is met. No tax-free lump sum can be paid from the GMP benefits.

On both basis, an amount must be retained to provide for a survivor's pension on death if the individual is married or has a civil partner.

A: Prior to 6 April 2006, pension plans for professional sports people could have a lower than normal minimum pension age. HMRC maintained a list of these occupations - for example professional football players could retire from age 35 and this entitlement could continue after that date.

Pension plans taken out after 6 April 2006 normally can't include a minimum pension age of earlier than age 55 even for sports people. However if a plan with a low pension age is block transferred into a new plan, the low pension age would be protected and would apply to the new plan.

Where the individual crystallises their benefits before 50, their level of lifetime allowance is reduced by what is called the relevant percentage.

The individual’s lifetime allowance will be reduced by 2.5% for each complete year between the date on which the benefit crystallisation event occurs and the date on which the individual will reach age 55. So, for an individual with a protected pension age of 35 who takes benefits on their 35th birthday there are 19 complete years between their 35th birthday and age 55. The reduced lifetime allowance alters the individual’s available lifetime allowance both for the purposes of calculating whether any lifetime allowance charge is due and in terms of the maximum pension commencement lump sum payable.

PTM062220 - Member benefits: pensions: protected pension age: right to take benefits before age 50

A: DWP will assume they’re receiving a ‘notional’ income from their drawdown plan and calculate the Pension Credit (and any other means-tested benefits they receive) accordingly, regardless of the amount of drawdown income they are actually taking.  ‘Notional’ income is an amount equivalent to the income that would be received if they had bought an annuity. They will also take capital of more than £10,000 into account, so their tax-free cash could also have an effect.

A: If it's uncrystallised, tax-free cash will still be available (25% of the plan value), the rest will be taxed as income at the individual's marginal rate of income tax. Of course this could in itself push them into the higher rate or even additional rate tax bracket.


The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.