Tax free lump sum - or not?

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
15 replies 1.9K views
SandLakeSandLake Forumite
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I have a pension coming to fruition next April and while I broadly understand the new rules I have just discovered something that is confusing me.

Traditionally you have been able to take 25% of your pension pot as a tax free sump sum, from next year I had thought this was being enhanced to being able to take 25% per year but I now believe it is significantly different to that, from next year you can take a lump sum and 25% of it is tax free

For example, 100,000 pot

I had thought 25000 could be taken tax free but now I think it is take 25000 and of that 6250 is tax free and the rest - 18750 is taxed at normal rate.

Which is right?
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Replies

  • SandLake wrote: »
    I have a pension coming to fruition next April and while I broadly understand the new rules I have just discovered something that is confusing me.

    Traditionally you have been able to take 25% of your pension pot as a tax free sump sum, from next year I had thought this was being enhanced to being able to take 25% per year but I now believe it is significantly different to that, from next year you can take a lump sum and 25% of it is tax free

    For example, 100,000 pot

    I had thought 25000 could be taken tax free but now I think it is take 25000 and of that 6250 is tax free and the rest - 18750 is taxed at normal rate.

    Which is right?

    Both are correct. It results in the same thing just the tax-free cash (25%) is taken in stages.
    Stephen Covey once said that "when you teach once, you learn twice". That is the primary reason for my participation on the forums as an IFA.

    Although I strive to provide accurate information in my posts, there may be the odd time when I fail. Yes I know it's hard to believe but even Your Hero can make mistakes. Apologies in advance.
  • dunstonhdunstonh Forumite
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    Traditionally you have been able to take 25% of your pension pot as a tax free sump sum, from next year I had thought this was being enhanced to being able to take 25% per year but I now believe it is significantly different to that, from next year you can take a lump sum and 25% of it is tax free

    There are no changes to the 25% TFLS.
    or example, 100,000 pot

    I had thought 25000 could be taken tax free but now I think it is take 25000 and of that 6250 is tax free and the rest - 18750 is taxed at normal rate.

    You can still take £25,000 tax free on that pot. Nothing has changed there.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • jamesdjamesd Forumite
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    From 6 April 2015 you have two options for this:

    1. 25% tax free lump sum and use the rest for drawdown or anuity purchase or some combination. If using drawdown you can draw as much as you like and it'll be added to your taxable income for the year in which you take it.
    2. A lump sum that is 25% tax free and 75% added to your taxable income for the year in which you take it. This is an alternative to starting drawdown, intended to be simple and for schemes that don't directly support drawdown.

    The portion that is not the tax free lump sum will have basic rate income tax deducted at source and be paid via PAYE from the pension place. As with a second job you'll need to let HMRC know what's happening so they can get your tax calculations right.
  • BootsoxBootsox Forumite
    171 Posts
    SandLake wrote: »
    I have a pension coming to fruition next April and while I broadly understand the new rules I have just discovered something that is confusing me.

    Traditionally you have been able to take 25% of your pension pot as a tax free sump sum, from next year I had thought this was being enhanced to being able to take 25% per year but I now believe it is significantly different to that, from next year you can take a lump sum and 25% of it is tax free

    For example, 100,000 pot

    I had thought 25000 could be taken tax free but now I think it is take 25000 and of that 6250 is tax free and the rest - 18750 is taxed at normal rate.

    Which is right?

    I too had this understanding at one point, maybe it was the way the media reported it.
  • dunstonhdunstonh Forumite
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    Bootsox wrote: »
    I too had this understanding at one point, maybe it was the way the media reported it.

    Media reporting has been poor. However, Govt announces have been just as bad. Its like the blind leading the blind and only talking in soundbites and headlines.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • GatserGatser Forumite
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    dunstonh wrote: »
    Media reporting has been poor. However, Govt announces have been just as bad. Its like the blind leading the blind and only talking in soundbites and headlines.



    Totally agree... shocking infact.
    I have had to point out to one financial expert journalist that their statements were both incorrect and potentially damaging... at least they did agree with me and promise to correct in the next publication. It is worrying that some people act upon such "good advice"
    ps. I am no expert either!
    THE NUMBER is how much you need to live comfortably: very IMPORTANT as part 1 of Retirement Planning. (Average response to my thread is £26k pa)
  • Hi all,

    I have just joined the forum and need your help with choosing the best private pension provider.

    I am self employed working in the healthcare industry.
    Never had a pension and am willing to start asap as I am in my 40s.

    Which provider is the best and safest as I have heard some do go belly up leaving you with nothing.

    I have had Hargreeve and Bestinvest calling me to come to them. What do you think of these two? Are there better providers?

    Which pension scheme is the best ? someone recommended SIPP?

    My wife works as part-time with a local council with a small pension, is there an advantage in doing for both of us rather than for only me?

    Any other advice would be greatly appreciated.

    Thanks in advance.
  • atushatush Forumite
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    AFAIK, you can still take your 25% TFLS once, at the beginning if you do not choose to take it in tranches.

    For some people, they may want to take the tax free money in stages with income up to their PA for tax reasons?
  • atushatush Forumite
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    Bosuntayo wrote: »
    Hi all,

    I have just joined the forum and need your help with choosing the best private pension provider.

    I am self employed working in the healthcare industry.
    Never had a pension and am willing to start asap as I am in my 40s.

    Which provider is the best and safest as I have heard some do go belly up leaving you with nothing.

    I have had Hargreeve and Bestinvest calling me to come to them. What do you think of these two? Are there better providers?

    Which pension scheme is the best ? someone recommended SIPP?

    My wife works as part-time with a local council with a small pension, is there an advantage in doing for both of us rather than for only me?

    Any other advice would be greatly appreciated.

    Thanks in advance.

    There is no "best provider" as this is determined by what investments you want to put into your pension, the charges for that investment on each platform, the range of investments to choose from, and the ease of use of the online interface. So we can't say, as what is best for person 1, would not be best for person 2.

    If you dont know what to invest in, you should either spend a few months reading up and learning or use the services of a paid IFA. Who can determine for you both the investments and the best platform.
  • LintonLinton Forumite
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    Bosuntayo wrote: »
    Hi all,

    I have just joined the forum and need your help with choosing the best private pension provider.

    I am self employed working in the healthcare industry.
    Never had a pension and am willing to start asap as I am in my 40s.

    Which provider is the best and safest as I have heard some do go belly up leaving you with nothing.

    I have had Hargreeve and Bestinvest calling me to come to them. What do you think of these two? Are there better providers?

    Which pension scheme is the best ? someone recommended SIPP?

    My wife works as part-time with a local council with a small pension, is there an advantage in doing for both of us rather than for only me?

    Any other advice would be greatly appreciated.

    Thanks in advance.

    Proper regulated pension providers such as Hargreaves and Bestinvest will NOT "go belly up leaving you with nothing". Any pensions with them are held completely separately to the company's internal finances. They merely have the right to administer them following your instructions.

    Your main choice is between a "private pension" (PP) held with a big pensions company such as Aviva or Standard Life (to choose two names at random) which offer a restricted set of investment funds or a SIPP (Self invested Private Pension) where you choose your own investments from an enormous range including funds, individual shares, bonds and other more esoteric options. Hargreaves and Bestinvest are typical SIPP providers.

    PPs would often be cheaper but with far fewer investment options and so suitable for a small investor with limited knowledge. SIPPs are more appropriate for someone who wants active control over his investments, requires the extra options SIPPs provide and has an understanding of investing.

    You could go to an IFA who would be able to set up a PP for you and recommend appropriate funds possibly cheaper than you could do yourself, although would charge for the work involved. Some PPs are only available via IFAs.

    If you wanted to go down the SIPP route you would be best advised to research the different providers yourself. There are a wide range with different charging, investments, website functionality etc etc Which is "best" would depend on how you wanted to use your SIPP.

    Whether it is worthwhile your wife having a second pension depends really on how much she can afford to put away each month. An alternative for small amounts could be to pay extra into her council pension with AVCs if available or perhaps she can buy extra years.
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