25% tax free

longwalks1

I have a final salary pension with my employer who I've been with for 20 years (I'm 41 now). I've recently started making additional payments to my AVC's/defined contribution plan (unsure of correct terminology)


I know at retirement you can take up to 25% as a lump sum. So, a couple of questions:


1) Is there a limit on the 25% amount you can take before you pay tax on it? And what is the tax rate?


2) Is the 25% taken from my final salary pension, my AVC's or from both?


Do you have to buy a pension plan with the remaining 75%, or can that be taken as a lump sum (and I'm assuming, paying tax on it)

Linton

britishboy wrote: »

I have a final salary pension with my employer who I've been with for 20 years (I'm 41 now). I've recently started making additional payments to my AVC's/defined contribution plan (unsure of correct terminology)


I know at retirement you can take up to 25% as a lump sum. So, a couple of questions:


1) Is there a limit on the 25% amount you can take before you pay tax on it? And what is the tax rate?

No limit, no tax.

2) Is the 25% taken from my final salary pension, my AVC's or from both?

It depends on your scheme. Some schemes regard the DB pension and AVCs as separate with their own 25%s. Others allow you to take the DB 25% from the AVC pot which is a much better deal. You will need to ask your pension people.

Do you have to buy a pension plan with the remaining 75%, or can that be taken as a lump sum (and I'm assuming, paying tax on it)

I assume you are talking about the AVC. I doubt whether current AVCs would support drawdown though perhaps they will by the tme you retire. Otherwise you should be able to transfer the AVC to a provider which supports drawdown, possibly taking the 25% after transfer rather than directly from the AVC.

dunstonh

No limit, no tax.

<Pedantic mode on>

Lifetime allowance. 25% of that is £257,500 (although defined benefit schemes are not technically 25% tax-free cash as they are calculated differently).

Plus, often its not effective to take maximum tax free cash from a DB scheme (we could list lots of caveats on this subject. Transitional reliefs, protected tax free cash, hybrid schemes, DB calculations etc).

Dox

Linton wrote: »

It depends on your scheme. Some schemes regard the DB pension and AVCs as separate with their own 25%s. Others allow you to take the DB 25% from the AVC pot which is a much better deal. You will need to ask your pension people..

Not how the DB bit of it works. The Rules of the scheme will set out how much tax free cash you can take from zero (unless the Rules provide for an automatic cash lump sum) to the maximum amount allowed by HMRC (unless the Rules impose a lower ceiling, which some do) - which isn't calculated as '25%'. You need to check with the pension scheme administrators what the minimum/maximum amounts are in the case of your scheme.