Idiots guide to pension tax free lump sum
Discussion
Please can somebody explain how the pension tax free lump sum works?
I’ve been googling this topic and I’m getting conflicting information, hence asking the collective font of all knowledge that is PH.
I had understood that upon reaching the eligible age, you could access your pension pot and withdraw up to 25% of the pot as a tax free lump sum, while leaving the remaining 75% to be drawn down at a later date (and paying the appropriate taxes on that 75%).
The information that I am getting says that if I draw down a lump sum from the pension pot, the first 25% of that sum is tax free, with the remaining 75% taxed at my marginal rate.
For example, if my pension pot is £100,000 and I want to draw down £10,000, the first £2,500 is tax free and the remining £7,500 is taxed.
My intention is to take the 25% lump sum and pay off my outstanding mortgage, but I don’t yet want to start accessing the pension pot for a pension income.
I hope that this makes sense and that somebody is able to provide a definitive answer.
I’ve been googling this topic and I’m getting conflicting information, hence asking the collective font of all knowledge that is PH.
I had understood that upon reaching the eligible age, you could access your pension pot and withdraw up to 25% of the pot as a tax free lump sum, while leaving the remaining 75% to be drawn down at a later date (and paying the appropriate taxes on that 75%).
The information that I am getting says that if I draw down a lump sum from the pension pot, the first 25% of that sum is tax free, with the remaining 75% taxed at my marginal rate.
For example, if my pension pot is £100,000 and I want to draw down £10,000, the first £2,500 is tax free and the remining £7,500 is taxed.
My intention is to take the 25% lump sum and pay off my outstanding mortgage, but I don’t yet want to start accessing the pension pot for a pension income.
I hope that this makes sense and that somebody is able to provide a definitive answer.
I think what you're talking about is an uncrystallised funds pension lump sum (UFPLS), which is the thing that was bought in by the last government in (I think) 2015 and which got everybody going on about people using their pension to buy a Lamborghini. That is a different thing from a pension commencement lump sum (PCLS), which is usually called 'tax free cash' and which does indeed allow you to take 25% of the value of your pension tax-free. I could go into the difference between crystallised and uncrystallised funds and when an UFPLS might make sense and when a PCLS might, but the main thing is that if you haven't done anything with your pension yet then the PCLS will be an option.
You can take the total 25% in TFC in one sum now - Labour may of course try and change this at some point.
Or as in your example you might take 25% of whatever total you decide to drawdown down on this year in TFC.
The amount of drawdown in total can be varied each year assuming your pension allows this.
If you take the entire pot of 25% in the one hit as TFC then in effect the entire pension is crystallised but you can continue to then drawdown each year as you see fit ( again assuming your pension allows this ) and the 75% remaining just stays in its existing investment funds.
Or as in your example you might take 25% of whatever total you decide to drawdown down on this year in TFC.
The amount of drawdown in total can be varied each year assuming your pension allows this.
If you take the entire pot of 25% in the one hit as TFC then in effect the entire pension is crystallised but you can continue to then drawdown each year as you see fit ( again assuming your pension allows this ) and the 75% remaining just stays in its existing investment funds.
If you have £100K, split it in your mind into 2 pots. Pot A has £25K available tax free. Pot B has £75K which is taxable (although currently, of you have no other income, you can take £12570 a year from the pot B tax free).
You can take your £25K tax free from pot A now, no problem.
But if you want to take any money from pot B, you must match it with 25% from pot A. So if you decide not to take money from pot A but you want to take £12570 from pot B, because you have no other income so it's getting money out of pot B tax free, you must also take £4190 out of pot A, even if you don't want to, Giving you a total of £16,760. All tax free.
So if you want £25K, you can take it all from pot A, but if you want it from pot B, you can't do that in full. You'll have to take £6250 from pot A and £18750 from pot B. And pay the tax due on the pot B withdrawal, based on your prevailing tax rate.
You can take your £25K tax free from pot A now, no problem.
But if you want to take any money from pot B, you must match it with 25% from pot A. So if you decide not to take money from pot A but you want to take £12570 from pot B, because you have no other income so it's getting money out of pot B tax free, you must also take £4190 out of pot A, even if you don't want to, Giving you a total of £16,760. All tax free.
So if you want £25K, you can take it all from pot A, but if you want it from pot B, you can't do that in full. You'll have to take £6250 from pot A and £18750 from pot B. And pay the tax due on the pot B withdrawal, based on your prevailing tax rate.
I was wondering something similar based on my belief that you can take 25% at 55 years of age...
If I have two pots - Pot A, worth an estimated £200k by the time I reach 55 and Pot B worth an estimated £1m by the time I retire...
Can I take 25% (£50k) from Pot A when I reach 55 and 25% (£250k) from Pot B when I retire at, say, 65?
If I have two pots - Pot A, worth an estimated £200k by the time I reach 55 and Pot B worth an estimated £1m by the time I retire...
Can I take 25% (£50k) from Pot A when I reach 55 and 25% (£250k) from Pot B when I retire at, say, 65?
There’s a chap called James Shack who has some really good videos on this on YouTube.
No connection, but he’s changed my previous view that you take the 25% lump sum at the outset and instead use as part of your tax planning going forward.
Obvious caveat is that this may be affected by changes to the TFLS going forward.
Regardless of that, I’d recommend his videos. I find them very insightful.
No connection, but he’s changed my previous view that you take the 25% lump sum at the outset and instead use as part of your tax planning going forward.
Obvious caveat is that this may be affected by changes to the TFLS going forward.
Regardless of that, I’d recommend his videos. I find them very insightful.
Roger Irrelevant said:
I think what you're talking about is an uncrystallised funds pension lump sum (UFPLS), which is the thing that was bought in by the last government in (I think) 2015 and which got everybody going on about people using their pension to buy a Lamborghini. That is a different thing from a pension commencement lump sum (PCLS), which is usually called 'tax free cash' and which does indeed allow you to take 25% of the value of your pension tax-free. I could go into the difference between crystallised and uncrystallised funds and when an UFPLS might make sense and when a PCLS might, but the main thing is that if you haven't done anything with your pension yet then the PCLS will be an option.
UFPLS is not the ‘Buy a Lamborghini’ option, that was the relaxation from having to buy annuities and letting people take all their pension out if they wanted to, taxed and tax free elements. UFPLS is where you DON’T take a pension commencement lump sum, but split the 25% lump sum up into small chunks and for example, take a chunk every month as part of your pension - so 25% of your monthly income is tax free, 75% is taxable at your marginal rate.
I’m planning on using UFPLS as I have no need for a large lump sum (although I have already taken a small lump sum for house renovations), and plan to retire at the end of the year.
MitchT said:
I was wondering something similar based on my belief that you can take 25% at 55 years of age...
If I have two pots - Pot A, worth an estimated £200k by the time I reach 55 and Pot B worth an estimated £1m by the time I retire...
Can I take 25% (£50k) from Pot A when I reach 55 and 25% (£250k) from Pot B when I retire at, say, 65?
Yes, but I’d look at consolidating your pots to which provider performs the best, or a third provider. You could still do two lump sums but not totalling more than 25%.If I have two pots - Pot A, worth an estimated £200k by the time I reach 55 and Pot B worth an estimated £1m by the time I retire...
Can I take 25% (£50k) from Pot A when I reach 55 and 25% (£250k) from Pot B when I retire at, say, 65?
Martin315 said:
There’s a chap called James Shack who has some really good videos on this on YouTube.
No connection, but he’s changed my previous view that you take the 25% lump sum at the outset and instead use as part of your tax planning going forward.
Obvious caveat is that this may be affected by changes to the TFLS going forward.
Regardless of that, I’d recommend his videos. I find them very insightful.
Logically I completely agree with him however I have no confidence that the government won't change the goalposts so I'd take the view that a bird in the hand is worth 2 in the bush and take my 25% right now if I was 55.No connection, but he’s changed my previous view that you take the 25% lump sum at the outset and instead use as part of your tax planning going forward.
Obvious caveat is that this may be affected by changes to the TFLS going forward.
Regardless of that, I’d recommend his videos. I find them very insightful.
The other thing to be aware of is the limit of £268,275 so if you're in the lucky position of having a pension pot worth 4 times that then there's certainly no reason not to take that straightaway.
alscar said:
You can take the total 25% in TFC in one sum now - Labour may of course try and change this at some point.
Or as in your example you might take 25% of whatever total you decide to drawdown down on this year in TFC.
The amount of drawdown in total can be varied each year assuming your pension allows this.
If you take the entire pot of 25% in the one hit as TFC then in effect the entire pension is crystallised but you can continue to then drawdown each year as you see fit ( again assuming your pension allows this ) and the 75% remaining just stays in its existing investment funds.
I had no intention of touching mine but I can see the way the Labour money grab thinking is going and maybe taking 25% which I don't really need now might be a better idea than losing the option in October or later.Or as in your example you might take 25% of whatever total you decide to drawdown down on this year in TFC.
The amount of drawdown in total can be varied each year assuming your pension allows this.
If you take the entire pot of 25% in the one hit as TFC then in effect the entire pension is crystallised but you can continue to then drawdown each year as you see fit ( again assuming your pension allows this ) and the 75% remaining just stays in its existing investment funds.
PabloEscortCar said:
I had no intention of touching mine but I can see the way the Labour money grab thinking is going and maybe taking 25% which I don't really need now might be a better idea than losing the option in October or later.
Tbh I had only taken a small amount of mine previously as part of my planning and probably wouldn’t have withdrawn the full 25% but didn’t want to risk Labour changes so decided to remove it all and allocate it for my 3 children's house funds / early inheritances. Martin315 said:
There’s a chap called James Shack who has some really good videos on this on YouTube.
No connection, but he’s changed my previous view that you take the 25% lump sum at the outset and instead use as part of your tax planning going forward.
Obvious caveat is that this may be affected by changes to the TFLS going forward.
Regardless of that, I’d recommend his videos. I find them very insightful.
Have subscribed, he is really good.No connection, but he’s changed my previous view that you take the 25% lump sum at the outset and instead use as part of your tax planning going forward.
Obvious caveat is that this may be affected by changes to the TFLS going forward.
Regardless of that, I’d recommend his videos. I find them very insightful.
alscar said:
PabloEscortCar said:
I had no intention of touching mine but I can see the way the Labour money grab thinking is going and maybe taking 25% which I don't really need now might be a better idea than losing the option in October or later.
Tbh I had only taken a small amount of mine previously as part of my planning and probably wouldn’t have withdrawn the full 25% but didn’t want to risk Labour changes so decided to remove it all and allocate it for my 3 children's house funds / early inheritances. Obviously if it turns out to be an inspired move I will claim it as my idea
PabloEscortCar said:
Your post on the pensions thread actually got me going with this, I also thought Labour might scrap the tax free 25%, then thought I was being paranoid, someone else thinking the same swung it - if this turns out to be a bad move I am holding you personally responsible.
Obviously if it turns out to be an inspired move I will claim it as my idea
Obviously if it turns out to be an inspired move I will claim it as my idea
I think there’s quite a few people who have done this.
When I first spoke to my official FA he had been asked by 8 other clients to look into this and I think 3 of us ended up doing it.
When I spoke to my “ unofficial FA “ he also totally supported it.
Obviously everyone’s motives for doing so may differ and compliance departments of any fund managers wouldn’t like or even accept “ because Labour “ as a reason for doing so.
Tbh I see at worst case this to be a neutral decision and at best ?
Inspired / Smug / Happy.
Paranoia rocks.
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