Take one anyway! (unless you are taking benefits directly from an employer’s final salary pension scheme).

Why?

Because even if you don’t want to take a tax free lump sum it will almost invariably be tax efficient for you to take the maximum allowable amount and re-invest it to provide you with an income.

A quick, simplified, example should help illustrate this suggestion.

Doreen, age 65, has a personal pension fund from which she could take a tax
free lump sum of £20,000 but she now wishes to convert that fund into an annual
income (‘annuity’). She does not want or need to take any part of the fund as a
lump sum. After selecting the most appropriate pension annuity for her
circumstances and requirements (for example, a joint life annuity, paid as a level
amount for her lifetime) she is quoted £1,000 per annum. All this is taxable and,
as she has other income which takes her into the basic rate of tax the liability
on this income is £200 per annum (i.e. 20% of £1,000).

If, however, Doreen takes the maximum amount of tax free cash - £20,000 –
and re-invests it into a Purchased Life Annuity (PLA) she would be quoted an
annuity, on exactly the same basis as her pension annuity, of a very similar
amount: £1,000 per annum. However, part of that £1,000 is deemed by the
Inland Revenue to be a return of her own money (i.e. part of the £20,000 she
has paid for the annuity) and is therefore free of tax. This ‘capital content’
might be, say, £600 per annum and, if so, Doreen would then be liable to pay
tax on only £400 per annum of her annuity income: thus a tax liability of only
£80 against a liability of £200 had she used all of the fund to provide an income.

Thus it is almost always beneficial to take the maximum permitted amount of tax free lump sum from a pension scheme other than a final salary scheme.

Why is it not the same principle for a final salary scheme?

Because members of most final salary schemes are only allowed to take a tax free lump sum if they forego (technically called ‘commute’) part of the pension they have been promised. The amount of pension a member must commute in return for every £1,000 of tax free cash varies quite markedly between different final salary schemes and so a more complex calculation should be completed to ascertain the value (or otherwise) of taking a tax free lump sum.

In summary, if you are nearing the age at which you want to start drawing benefits form your pension scheme and you want a full assessment of the value of each of your options…..