Final Salary Pension Lump Sum Advice: Key Considerations for UK Expats

While a DB pension is primarily designed to provide a guaranteed income for life, often with inflation protection and dependant benefits, expats seeking greater control over their pension funds may consider taking tax-free cash by commuting part of their pension at retirement, subject to scheme rules and statutory limits.

This article provides essential final salary pension lump sum advice for UK expats. It highlights the pros and cons of lump sum withdrawals, explains their tax treatment in the UK and overseas, and suggests alternative strategies, including pension transfers, that may be more suitable than withdrawing DB benefits as a lump sum in certain circumstances.

What Is a Final Salary Pension Lump Sum Withdrawal?

Taking a lump sum from a final salary pension means taking tax-free cash at the point you start (crystallise) your pension benefits, rather than making a flexible withdrawal from a personal pension. This one-off tax-free lump sum is known as the pension commencement lump sum (PCLS) and is available to individuals who have reached the normal minimum pension age of 55, although this will rise to 57 from 6 April 2028, unless a protected pension age applies.

The amount of the final salary pension you can take tax-free is normally capped at up to 25% of the value of benefits coming into payment, subject to HMRC limits and the rules of the individual pension scheme, and is capped by the lump sum allowance (LSA), which is currently £268,275, unless you hold a protected higher amount. The LSA applies to the combined value of all tax-free lump sums taken across all your registered pensions.

Why Lump Sums From Final Salary Pensions Are Not Always Available at 25%

Although UK pension rules allow up to 25% of pension benefits to be taken as tax-free cash, many defined benefit schemes restrict how much cash can actually be paid.

This depends on scheme-specific commutation factors, automatic lump sum provisions, and HMRC valuation rules.

As a result, some members cannot take the full 25% as a lump sum even if they have sufficient lump sum allowance remaining.

How Does Taking a Lump Sum From a Defined Benefit Pension Impact Guaranteed Income?

Unlike defined contribution schemes, final salary pensions are designed to provide a guaranteed income for life, often with inflation linkage and dependant benefits.

Instead of accumulating pension benefits in a dedicated investment fund, DB pension holders are entitled to a predetermined annual pension calculated under the scheme rules.

For this reason, taking a lump sum from a final salary pension usually requires commuting a portion of your future annual pension at the point you start drawing benefits, in exchange for tax-free cash.

To enable you to access the lump sum, final salary pension providers typically follow these steps, although the precise calculation varies by scheme:

Certain DB schemes accrue lump sum benefits automatically and separately from annual pension income. In these cases, taking the lump sum does not reduce the pension, as it is included in the scheme’s structure by default. A typical structure is as follows:

1. Pension: 1/80th of final pensionable pay per year of service
2. Automatic lump sum: 3/80ths of final pensionable pay per year of service

How Are Final Salary Pension Lump Sum Withdrawals Taxed in the UK?

For UK tax purposes, the PCLS taken from a final salary pension is normally paid free of UK income tax, provided it is an authorised payment and within your available lump sum allowance (LSA), which is £268,275 unless you hold a protected higher amount. UK tax residence does not usually affect whether the PCLS is subject to UK income tax, but overseas tax may still apply.

Any tax-free lump sums taken in excess of your available LSA are generally taxable at your marginal rate of UK income tax, with the precise tax treatment depending on the type of lump sum paid.

If you pass away before age 75, certain pension death benefits may be paid to your beneficiaries without UK income tax, subject to the lump sum and death benefit allowance (LSDBA), which is £1,073,100, and subject to scheme rules and payment conditions (including timing requirements). Defined benefit schemes often provide dependant’s pensions rather than lump sums, and these are taxed differently.

However, if you die after age 75, pension income or lump-sum death benefits paid to beneficiaries are generally subject to UK income tax at the beneficiary’s marginal rate, depending on the form of benefit paid.

Note: From 6 April 2027, the UK government has announced that most unused pension funds and death benefits will be brought within the scope of UK inheritance tax (IHT).

This change is separate from the income tax treatment described above and may affect the overall tax position of pension death benefits, depending on scheme rules and individual circumstances.

How Are Final Salary Lump Sums Taxed Overseas?

While the PCLS is normally free of UK income tax, your country of residence may still tax it under local law. This is the case in some popular expat destinations, including France and Spain, where UK pension lump sums may be treated as taxable income under local tax rules, even if they are tax-free in the UK.

The precise tax treatment depends on the country of residence, the nature of the pension, and the relevant double taxation agreement (DTA). As a result, taking a lump sum while resident in France or Spain may give rise to a local tax charge, and professional advice should be taken before timing a lump sum around a move abroad.

More generally, taking a PCLS while resident overseas can trigger local tax charges, even though no UK income tax is due. Before timing a lump sum around a move abroad, it is essential to check both local tax law and the relevant double taxation agreement, as treaty treatment varies by country and by pension type.

The taxable portion of your pension income may also be subject to tax in your country of residence rather than the UK, depending on the DTA. Where a DTA applies, tax relief is usually available to prevent double taxation, but the mechanism for claiming relief depends on the treaty and local procedures.

In countries with no personal income tax, like the UAE, local tax on pension income may be nil. However, UK tax treatment and treaty allocation depend on the type of pension and the specific DTA, and taxable pension income should not be assumed to be payable entirely free of tax without confirmation.

Our experienced financial advisers at Titan Wealth International assist expats in navigating their cross-border tax obligations. They assess pension type, residency status, and applicable DTAs to help ensure pension benefits are taxed correctly in both the UK and the country of residence.

What Are the Potential Advantages of Taking a Lump Sum From a Final Salary Pension as a UK Expat?

Withdrawing a one-off lump sum from a defined benefit pension as an expat can provide potential benefits in certain circumstances, including:

1. Immediate access to capital.
2. Greater flexibility in managing retirement income.
3. Improved alignment with overseas tax planning (in some cases).
4. Simplification of cross-border pension administration.

Immediate Access to Capital

Taking a lump sum from a DB pension provides immediate liquidity, but it is normally taken at the point you start (crystallise) your pension benefits by commuting part of the guaranteed income, rather than as a standalone withdrawal. The cash can be used to:

• Reduce any outstanding debt
• Settle mortgage payments
• Gift funds to family members
• Cover major expenses such as medical bills
• Deploy capital outside the pension environment, including reinvestment in tax-efficient or locally appropriate structures, depending on residency

Greater Flexibility in Managing Retirement Income

Apart from providing immediate liquidity, commuting part of a defined benefit pension into a lump sum can provide greater personal discretion over how your retirement funds are used once they are outside the pension scheme. The available lump sum management and investment options include:

• Investing outside the pension environment: Allows capital to be allocated to assets such as residential or commercial property, equity markets, funds, or other investments, subject to local tax rules, investment risk, and suitability considerations.
• Holding cash in a bank account: Suitable for short-term needs and ready access, albeit with limited growth potential. You should consider deposit-protection limits in the relevant jurisdiction, prevailing interest rates, and counterparty risk.
• Investing via an ISA: Provided you are still a UK resident, you can invest the lump sum in an individual savings account (ISA) up to the annual ISA allowance. Returns within an ISA (interest, dividends, and capital gains) are free of UK income and capital gains tax. UK non-residents cannot make new ISA subscriptions, though existing ISAs can usually be retained but may be taxed locally.

Additionally, taking a defined benefit pension lump sum may allow an expat to manage currency risks more actively. You can hold the proceeds in a multi-currency account and withdraw or convert them into your local currency when exchange rates are more favourable, subject to local banking and tax considerations.

Improved Alignment With Overseas Tax Planning

For some UK expats, taking a lump sum can support overseas tax planning by providing greater control over the timing and form of taxable income, depending on local tax rules and the relevant double taxation agreement (DTA).

This flexibility may be particularly relevant in countries where pension income is taxed annually at progressive rates.

Simplification of Cross-Border Pension Administration

Taking part of a final salary pension as a lump sum may reduce reliance on ongoing pension payments from the UK.

For some expats, this can simplify cross-border administration by limiting exposure to overseas banking issues, currency conversion requirements, and ongoing interaction with UK pension administrators.

What Are the Drawbacks of Taking a Lump Sum From a Defined Benefit Pension?

The key drawbacks of taking a final salary pension as a lump sum include:

1. Lower retirement income
2. Cross-border tax risks
3. Potential exposure to inheritance tax

Potentially Lower Retirement Income

Depending on your scheme’s commutation factor, withdrawing a lump sum from a DB pension can significantly reduce your retirement income. The reduction is permanent and applies for life, and the impact varies by scheme.

You may lose a material proportion of your guaranteed income, assuming the following figures apply:

• Your commutation factor is 10:1
• Your annual pension entitlement is £20,000
• You plan to take a lump sum of £50,000

In this scenario, you would be required to give up £5,000 per year, reducing your annual retirement income to £15,000, before allowing for inflation increases or dependant benefits that would also be reduced.

Cross-Border Tax Risks

Withdrawing a final salary lump sum while residing abroad requires careful consideration of cross-border tax laws.

Although a PCLS is normally free of UK income tax, your country of residence may tax it under local law. As a result, a lump sum that is tax-free in the UK may still be treated as taxable income overseas, depending on local rules and the applicable double taxation agreement.

In countries such as France, UK pension lump sums may be treated as taxable income for local tax purposes, even though they are tax-free in the UK.

The applicable tax rate depends on individual circumstances, local rules, and any available reliefs, rather than a fixed rate. Professional advice should be taken before timing a lump sum while resident overseas.

Potential Exposure to Inheritance Tax

Under current rules, many pension death benefits are typically paid outside of the estate for UK inheritance tax (IHT) purposes, depending on scheme rules and how benefits are paid.

However, from 6 April 2027, the UK government has announced that most unused pension funds and death benefits will be brought within the scope of UK inheritance tax, with personal representatives responsible for reporting and paying any IHT due.

If you withdraw a PCLS from a final salary scheme and retain the cash (or gift it), those funds will generally enter your estate for IHT purposes once held personally, unless mitigated under UK lifetime gifting rules or other appropriate estate-planning arrangements, and subject to local estate or succession taxes if you are resident overseas.

When Should You Consider a Pension Transfer Instead of a Lump Sum Withdrawal?

Instead of taking a lump sum, you may consider transferring your DB pension to a plan that provides more investment and withdrawal flexibility, such as a defined contribution (DC) scheme, where this aligns with your objectives and risk tolerance.

These arrangements allow you to allocate the transferred funds to a range of investments chosen by you, but do not provide guaranteed income, and outcomes depend on investment performance and withdrawal behaviour.

A transfer is an irreversible decision and involves exchanging your guaranteed pension income for a specific amount known as the cash equivalent transfer value (CETV). Your DB scheme’s actuary calculates this value based on factors such as:

• Your age, accrued service, and scheme benefits.
• The scheme’s funding position and transfer terms.
• Inflation assumptions and indexation caps.

If you proceed with the transfer, the CETV is paid to the receiving scheme of your choice. Before initiating any transfer, confirm that the destination plan is eligible to accept DB transfers, is appropriate for your country of residence, and that its investment options, charges, and withdrawal features align with your needs and cross-border tax considerations.

If your safeguarded DB benefits exceed £30,000, you must obtain advice from an FCA-authorised adviser before transferring. In practice, many advisers will recommend retaining DB benefits unless there is a strong and demonstrable reason to transfer, and many receiving schemes will not accept a transfer without a positive recommendation.

Titan Wealth International can help you understand whether a transfer is appropriate, but a recommendation to transfer is not guaranteed.

The DB pension transfer specialists we work with will assess your residential and financial circumstances and the value of the benefits being given up to recommend a suitable pension strategy.

Benefits and Drawbacks of Transferring a Final Salary Pension

For some UK expats, a DB pension transfer may address limitations associated with DB lump sums, but this comes at the cost of giving up guaranteed benefits. Potential considerations include:

A defined benefit pension transfer removes the certainty of a guaranteed, inflation-linked income for life and replaces it with investment and longevity risk.

Investment performance, charges, and withdrawal decisions will determine outcomes, offering the possibility of higher income in some scenarios, but also the risk of materially lower income or depletion of funds.

Where Can You Transfer a Final Salary Pension as an Expat?

When transferring a final salary pension, the receiving arrangement must be eligible to accept defined benefit (DB) transfers, and the suitability of each option depends on your residency, tax position, and objectives. Common receiving options include:

• Self-invested personal pensions (SIPP): Self-invested personal pensions (SIPPs) are UK-registered pension schemes regulated in the UK – international SIPPs are typically UK-registered SIPPs designed for internationally mobile clients. They can provide access to a wide range of investments, but remain subject to UK pension and tax rules, and overseas tax treatment depends on your country of residence. There is no statutory cap on the amount that can be transferred to a SIPP, although provider acceptance criteria, charges, and mandatory DB transfer advice requirements apply. SIPPs are commonly used for pension consolidation, but they do not provide guaranteed income.
• International private pension plan (IPPP): Some offshore retirement arrangements are marketed to internationally mobile individuals. However, unless an overseas arrangement is a qualifying recognised overseas pension scheme (QROPS), it will generally not be able to accept a transfer from a UK-registered pension without triggering unauthorised payment tax charges or scheme refusal. UK DB pension transfers should therefore only be made to receiving schemes that are confirmed as eligible under UK tax rules.
• Qualifying recognised overseas pension scheme (QROPS): QROPS are overseas pension schemes that meet HM Revenue and Customs (HMRC) requirements and are permitted to accept transfers from UK-registered pensions. Transfers to a QROPS are tested against the overseas transfer allowance (OTA), which is currently £1,073,100 unless you hold a protected higher amount. Where a relevant transfer exceeds your available OTA, an overseas transfer charge of 25% can apply to the excess, subject to specific exemptions and conditions. Local tax treatment of benefits paid from a QROPS depends on the country in which the scheme is established and your country of residence.

To select a pension transfer scheme that aligns with your retirement goals and provides appropriate tax treatment of your pension benefits both in the UK and abroad, it’s advisable to seek regulated DB pension transfer advice from a professional financial adviser before initiating any transfer.