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Early retirement

I will be taking early retirement at age 54 early in 2010 and drawing my NHS pension. I understand it is possible to increase my tax-free lump sum and decrease my annual pension. I think it might be better to maximise the pension rather than the lump sum but I am having difficulty deciding. Can you advise?

The so-called 1995 section of the NHS Pension Scheme (NHSPS), applicable to members who joined before 1 April 2008, provides a tax-free lump equivalent of three times annual pension.

This is less than the maximum permitted but members can give up some of their pension entitlement to increase their lump sum up to the maximum.

The maximum is generally 5.36 times the pension, and you must commute (give up) £1 of pension for each additional £12 of lump sum.

Whether it makes sense to take the maximum lump sum depends on individual circumstances.

For example, if you think that you will have sufficient remaining income (from all sources) to maintain your desired lifestyle, taking the maximum might enable you to spend capital on things you could not otherwise afford.

But if your cash flow might be stretched, taking the largest pension possible may provide greater peace of mind.

I suggest you ask your financial adviser to conduct a comprehensive review of lifestyle and financial needs first.

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