Tax free lump sum

readerc

Hi there, does anyone know if you get 25% of the whole pension pot tax free - even if the pot exceeds the LTA? Many thanks.

readerc

Ignore that, have just found the answer. Any lump sum over the LTA is taxed at 55% and any left in the pot is subject to 25% up front tax with additional tax payable as you draw it down.

mania112

Here's the answer!

Example: Your pension pot is £1.5m (you have no protection and the limit is £1m - as per 5th April onwards).

You decide you want all your Pension Commencement Lump Sum (the proper name for Tax Free Cash) in one go - to avoid worrying about phased withdrawals in this example. You're entitled to 25% of the LTA - £250,000 - tax free.

However, when this process happened a 'Benefit Crystallisation Event' occurred and it was found that you were £500,000 over the lifetime allowance. On this excess there is a penalty, depending on the way you draw this excess:

1) if you take an income - i.e an Annuity or income drawdown payments (UFPLS is not an option I understand) you will be charged 25% of the £500,000.

2) If you take the excess as a cash lump sum you'll pay 55% - and therefore end up with £225,000 of the excess (and then £750,000 remains in the pot)

Both solutions are actually more-or-less the same from a tax point of view because you'll also be paying income tax on the first option.