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

Bravepants

Rocksolid said:

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?

Well, my SIPP began life as an AVC as part of my work's pension. BUT I realized that I would have more options with the fund if I transferred to a SIPP. My intention is to have 5 years' worth of tax free drawdown to carry me from age 55 to 60, when my main DB pension kicks in. I only have cash in the SIPP, no investments, and I am only using it to save tax, and take advantage of the 25% tax free amount.

kangoora

barnstar2077 said:

Albermarle said:

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.

My sister and BIL re-mortgaged every few years and went on a lot of nice holidays, effectively never reducing their mortgage over a 12 year period. I believe her retirement 'strategy' revolved around a 'potential'  inheritance to clear her mortgage but mum is still going strong and healthy at 90 years old. However, she died of cancer 4 months after being diagnosed at 47 years old so, in her case, spending money was the correct strategy for more enjoyment/life experiences up to her death. BIL was in a bit of a pickle money-wise for a time but managed to come out of it.

Obviously this is an extreme and fairly rare example and by no means recommended

pjread

Marcon said:

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.

Lifetime allowance, assuming it's still around the same level in real terms in ~20 years (which is crystal ball territory, but you can only plan on what you know). 

Albermarle

pjread said:

Marcon said:

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.

Lifetime allowance, assuming it's still around the same level in real terms in ~20 years (which is crystal ball territory, but you can only plan on what you know). 

Problem is if the tax free sum taken  is quite large , then you have problems sheltering it from tax and maybe end up paying CGT or dividend tax . For sure you will create an admin headache . 
Normally the advice is not to let the tax tail wag the investment dog. Going over the LTA by hundred grand or two is not the end of the world. Nice problem to have in fact and the Givt sure need your money !

brewerdave

Some DB schemes did not allow the 25% lump sum to be commuted to give a higher pension in retirement. My wife retired from the NHS under the 1995 scheme and there wasn't a choice.

pjread

Albermarle said:

pjread said:

Marcon said:

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.

Lifetime allowance, assuming it's still around the same level in real terms in ~20 years (which is crystal ball territory, but you can only plan on what you know). 

Problem is if the tax free sum taken  is quite large , then you have problems sheltering it from tax and maybe end up paying CGT or dividend tax . For sure you will create an admin headache . 
Normally the advice is not to let the tax tail wag the investment dog. Going over the LTA by hundred grand or two is not the end of the world. Nice problem to have in fact and the Givt sure need your money !

Yeah hence the conditional bit which will depend on position and rules at the time; but with everything else equal, I'd pull out at least (whatever I can shelter in an ISA or similar) + (anything I need short term - e.g. to clear residual mortgage if any, help kids out) + (maybe something to push in to VCTs or other vehicles to offset some income tax, but only if I don't need access to and could afford to lose).  Maybe that means dripping out the lump sum over a few years.

I doubt I'm alone in thinking I pay enough tax as it is   But whether my plan's good or stupid, I guess the point for the OP is you should have a plan for it.  And I'd suggest reflecting before deciding that plan is a new car/house/whatever

Dandytf

pjread said:

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...

Taking 25% from Pension to add to an ISA.
Does a new or existing Isa offer more of a return over 5-10 yrears.
Sounds interesting, I 'thought' Pension was the way to go for higher returns,
t.i.a..

AlanP_2

Dandytf said:

pjread said:

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...

Taking 25% from Pension to add to an ISA.
Does a new or existing Isa offer more of a return over 5-10 yrears.
Sounds interesting, I 'thought' Pension was the way to go for higher returns,
t.i.a..

Neither a Pension or an ISA provide returns, they are tax wrappers. Returns come from your investments within the wrapper.

Pensions gain over ISAs whilst building them up due to the tax relief but whether you purchased Apple shares (simplistic example) in a pension or in an ISA the returns on the Apple shares would be the same over 5-10 years.

westv

I don't know whether it's worth comparing the gross income you will be taking less the income less tax and seeing how many years it will take you to receive the 25% compared to taking it all in one go.

pjread

Dandytf said:

pjread said:

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...

Taking 25% from Pension to add to an ISA.
Does a new or existing Isa offer more of a return over 5-10 yrears.
Sounds interesting, I 'thought' Pension was the way to go for higher returns,
t.i.a..

If you're not near the lifetime allowance, leaving it in pension probably makes sense