Is it mandatory to take the 25% lump sum from the pension pot when you retire?

Rocksolid

I see it always accounted in website to plan your retirement, but I don't understand, why someone wants to do it? Just is because there the tax relief? (so all cash free of taxes)

Or because the people didn't plan well their lifes (or something bad happened), and they use this cash for paying the mortgage and other things?

Bravepants

No, it's not mandatory to take it all at once. However, some people do use it to pay off either their mortgage or some other large debt before they retire.

In my case, I am due a lump sum from a DB pension when I retire, BUT I am not going to take it as I prefer the security of a larger pension.

Also, I have a SIPP and I plan to use the 25% tax-free amount to allow me to draw up to my annual tax allowance plus 25%, i.e. £12,500 / 0.75 = £16,666 per year tax free.

pjread

Not mandatory; some might roll it in to regular drawdown & get 25% of each withdrawal tax free rather than a 'glut' up front (there's an acronym for this, something like UFPLS?) 

Personally I'd plan to pull out the tax free cash as fast as I could feed ISA's or other shelters if they exist when I get there, and possibly cover any debts if they exist (e.g, many might clear an outstanding mortgage). 

Oh, and of course to buy the Lambo & world cruise...

zagfles

You don't have to take the 25% tax free element but most people would rather not pay tax if they don't have to. In a DB pension it's often sensible not to take the tax free cash as the commutation rates are often rubbish (eg you lose £1,000pa pension for taking a £10,000 tax free lump - would usually be better taking the full pension even though it's taxable).

In a DC pension you can take the 25% in stages through phased drawdown or UFPLS, you don't need to take it all at once. For instance if you have no other income, you could take a UFPLS of £16,666 a year and pay no tax (25% tax free, 75% taxable but covered by your personal allowance).

Albermarle

Rocksolid said:

I see it always accounted in website to plan your retirement, but I don't understand, why someone wants to do it? Just is because there the tax relief? (so all cash free of taxes)

Or because the people didn't plan well their lifes (or something bad happened), and they use this cash for paying the mortgage and other things?

I do not know the statistics but despite any sensible advice most people just can not wait to get their hands on it - new car - holiday etc 

barnstar2077

Albermarle said:

Rocksolid said:

I see it always accounted in website to plan your retirement, but I don't understand, why someone wants to do it? Just is because there the tax relief? (so all cash free of taxes)

Or because the people didn't plan well their lifes (or something bad happened), and they use this cash for paying the mortgage and other things?

I do not know the statistics but despite any sensible advice most people just can not wait to get their hands on it - new car - holiday etc 

Yep, I have a friend who can't wait to spend his on a new motorbike, despite not having much of a retirement plan in place.  He says "You only live once, so why not?"  Although I value retiring earlier over having toys to play with now, I can't really say that he is wrong though, I mean no one knows how long they have, so who am I to judge.

Marcon

pjread said:

Personally I'd plan to pull out the tax free cash as fast as I could feed ISA's or other shelters if they exist when I get there, 

Why? The money is already in a tax sheltered environment, and probably a better one than an ISA or other shelter. What's wrong with leaving it there and drawing it down as you need it.

squirrelpie

Rocksolid said:

I see it always accounted in website to plan your retirement, but I don't understand, why someone wants to do it? Just is because there the tax relief? (so all cash free of taxes)

Some good comments from others. One additional point to consider is that you can only take [up to] 25% tax free when you crystallize some pension money. With some providers nowadays you can part-crystallize your pot pretty much as often as you want, albeit there might be fees. But with other providers and particularly with old-fashioned plans and defined benefit plans you can only crystallize the whole pot once at the beginning and if you don't take the whole 25% at that point, you will leave it in the pot and be taxed on it in due course. So do check carefully that whatever you plan to do is actually possible with the provider(s) you actually have and check what it will cost. If you don't like the answers, you may be able to change provider.

Rocksolid

Bravepants said:

No, it's not mandatory to take it all at once. However, some people do use it to pay off either their mortgage or some other large debt before they retire.

In my case, I am due a lump sum from a DB pension when I retire, BUT I am not going to take it as I prefer the security of a larger pension.

Also, I have a SIPP and I plan to use the 25% tax-free amount to allow me to draw up to my annual tax allowance plus 25%, i.e. £12,500 / 0.75 = £16,666 per year tax free.

Thanks, but what about the SIPP? Why do you have SIPP?

I ask because the maximum that I would do as my latest knowledge, other than the employer and my mandatory contribution, it's to add maximum 100 pounds every month in an investment plan for retirement, Aviva performed 10% each year the last 4 years for example, now I don't know how the hell a pension plan performs so much, but anyway, that's what they do...

Basically, not sure what I can get more from a SIPP...

Thanks all!!!

zagubov

Some providers don't make it worth considering as the conversion from lump sum to pension is so poor, no sensible person would do it. I think the TPS is like that.

Not so long ago, people didn't survive so long past their pension age, so getting three years pension in one go was probably more of a good deal. 

Marcon

zagubov said:

Some providers don't make it worth considering as the conversion from lump sum to pension is so poor, no sensible person would do it. I think the TPS is like that.

Not so long ago, people didn't survive so long past their pension age, so getting three years pension in one go was probably more of a good deal. 

Taking tax free cash from a DB scheme was a no brainer in the 1980s and early 1990s. You got a chunk of cash and could (at that time) get an excellent annuity rate if you wanted to use it to buy a personal (as opposed to a 'pension') annuity. Because it was an annuity bought with your own cash - which the tax free lump sum became as soon as the pension scheme had popped it in your bank account - the tax treatment was favourable because only part of the annuity was subject to income tax the remainder of each monthly payment being treated as a return of capital.

This mindset continued long after annuity rates had started to drop, but undoubtedly did a lot to establish a fashion for taking maximum tax free cash from a DB scheme.