The lump sum remains a powerful psychological anchor, with more than two in five (44%) who are planning to take the cash in one go saying it will mark the start of their retirement journey, while 31% say it will give them greater control. Standard Life Centre for the Future of Retirement calls for clearer, timely guidance so people can weigh up immediate goals against longer-term financial security
Tax-free pension cash is acting as a powerful psychological anchor for many over-55s as they approach retirement, according to new research from the Standard Life Centre for the Future of Retirement, with two-fifths (42%) saying they either plan to take the full lump sum in one go or have already done so.
The research amongst 55-70-year-olds with defined contribution (DC) pensions finds that, among those planning to take the 25% tax-free lump sum in one go, over two-fifths (44%) say it will mark the start of their retirement journey. A third (32%) say it will give them a sense of financial security and a fifth (21%) say they view it as a separate pot of money entirely.
The research accompanies a new Standard Life Centre for the Future of Retirement report3, which explores the behaviours of people accessing their retirement funds. The findings show the tax-free lump sum is often seen as a tangible reward after a lifetime of saving and reveals many people mentally separate the lump sum from the rest of their pension, treating it as a bonus earmarked for big financial decisions.
Many people prioritise simplifying their finances before retirement, often using the lump sum to reduce debt or pay off a mortgage in order to create a “clean slate”. According to the polling, the majority (90%) of 55-70-year-olds say they want their finances to be as simple as possible before retirement. The research also found that more than two-thirds (68%) feel confident about deciding how and when to take their tax-free cash.
The intended use of tax-free cash varies, but the findings suggest many approach it with a clear purpose in mind. More than a quarter of those who plan to take a lump sum (28%) expect to use it for an expensive treat such as a car or holiday, while the same proportion plan to use it as initial income for day-to-day expenses before they access the rest of their pension. More than one in five (22%) plan to reinvest it elsewhere, and 17% want to reduce their working hours and top up their income with it. Less than one in 10 (9%) say they have no particular use in mind.
Catherine Foot, Director of the Standard Life Centre for the Future of Retirement, said: “The tax-free lump sum is frequently viewed as a reward after many years of saving. The psychology at play is interesting and people typically think of this money as a distinct pot, not necessarily treating it as retirement income. While retirement income decision-making is regularly associated with feelings of uncertainty, when it comes to tax-free cash many people have a clear plan in mind for the money.
“The decision to take a lump sum in full may be right for many, with many using it to secure a regular income, but it also carries the risk of depleting a pension pot too early if not carefully managed. Its influence also exposes the importance of timely, accessible guidance that supports people’s long term financial security, alongside their short-term needs.
“The findings highlight the need for clearer, well-timed and more accessible support to help people understand how and when to use tax-free cash, the trade-offs involved in taking it in full or in stages, and how to balance short-term peace of mind with long-term regular income security.”
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