25% tax free lump sum(s)

MFW_ASAP

Sorry if these have been asked before but I was wondering about the process of taking the tax free lump sum from a pension. I currently have three pensions; a final salary, a SIPP and a company Defined Contribution pension.

I'd be looking at taking out the 25% lump sum from the SIPP, which I estimate to be about £50k, at age 55 and will then leave this pension invested without taking any further monies from it.

I'll continue working and contributing to the company pension.

The questions I have are:

1. Do I have to take the full £50k tax free amount from the SIPP, or can I withdraw it over a few years, drip feeding it into an ISA?

2. Does taking the 25% tax free from one pension affect future contributions to other pensions? I'm sure I read something about this, but can't find it now.

3. Are there any pitfalls in taking the 25% that I haven't considered?

Thanks in advance for any comments.

dunstonh

1. Do I have to take the full £50k tax free amount from the SIPP, or can I withdraw it over a few years, drip feeding it into an ISA?

You can do it either way.

2. Does taking the 25% tax free from one pension affect future contributions to other pensions? I'm sure I read something about this, but can't find it now.

Only if you are getting close to the lifetime allowance limits. Otherwise no.

3. Are there any pitfalls in taking the 25% that I haven't considered?

its a once only transaction. If the 75% less goes on to grow, then you dont get another bite at the cherry. So, taking 25% out early can cost you in the long run.

Also, if you plan to utilise phased drawdown in future, you wont be able to tax efficiently as you would have already taken the 25% out. if your estate is above the IHT thresholds then its seems like a silly thing to do as you would be taking it out of a greater tax free environment and putting it into a lesser tax free environment but with no difference in in the investments and charges.

Finally, your defined benefit scheme wont be able to offer drawdown.

xylophone

http://www.scottishwidows.co.uk/extranet/literature/doc/FP0481
might be worth a read.

jamesd

MFW_ASAP wrote: »

3. Are there any pitfalls in taking the 25% that I haven't considered?

The main risk is people using it for unwise things, with paying off a mortgage possibly being the most common single mistake after blowing the money completely. But you seem to be planning to reinvest it in an ISA, which protects against future income tax increases, so that looks like a fine idea.

Just be sure you don't take out more than the 25% tax free lump sum. If you take out even a penny more your money purchase annual allowance for pension contributions will be reduced from £40k to £10k a year. No need to worry about this if you will never pay in more than £10k but many people might do it with redundancy payments or just before retiring.

You don't have to put the money into an ISA. While there are rules that limit recycling of tax free lump sums one of the easiest limits to stay within for many is not to take out more than £7,500 in any rolling twelve month period, not tax year. Stick to that and you can recycle it into new pension contributions to get a second chunk of tax relief.

An alternative limit involves not increasing contributions to a pension by more than 30% of the lump sum value, measured over the year of taking it and the two years before and after. Someone already paying in at the annual limit wouldn't have to worry about breaching this one, nor would someone who had a habit of making large contributions before taking the lump sum, so that there was a decrease or the total increase was less than 30%.

There's no restriction on one person taking tax free lump sum money from their pension and giving it to another person to invest in their own pension.