Tax free lump sum

Brricktop69

I am sure this must have been asked before but I can't see it anywhere so apologies if so.

Basically I am unsure how the 25% tax free lump sum on my pension works.

I am due to retire in 15 years time and expect to have a pension pot of around £300k.
My understanding is that on my retirement date i would be able to pull £75k as a tax free sum leaving £225k that would be taxable, if i based this on lasting for 22.5 years then it would give me an annual taxable income of £10k per year.

However, what I am struggling to understand is what would happen if I took some or the full 25% early such as when I am 60 but still continue to work?

My intention is to keep the money in my pot until I retire but want to ensure that I understand the options in case of anything unexpected.

dunstonh

My understanding is that on my retirement date i would be able to pull £75k as a tax free sum leaving £225k that would be taxable, if i based this on lasting for 22.5 years then it would give me an annual taxable income of £10k per year.

Taking the tax-free lump sum upfront is one of the options.  There are other options. Such as taking it on drip (each withdrawal you make being made up of 25% tax free and 75% taxable).

You remain invested when you use the method you are suggesting.  So, its not a straight line £10k a year = 22.5 years.

However, what I am struggling to understand is what would happen if I took some or the full 25% early such as when I am 60 but still continue to work?

Your retirement provision would be 25% lower and you would likely pay more taxes over your lifetime by not having the tax free cash available to utilise in retirement.

Albermarle

Do not confuse retirement with when you can take your pension. Currently you can take your pension ( all your pot if you so wished ) on your 55th birthday, although this will have increased to 57 at some point . Whether you are retired or still working is not relevant .
What you are considering is called drawdown . You take the 25% TFLS and the rest stays invested, and you take taxable income from it , or just leave it alone and take it later . . As Dunstonh says it is not usually the best thing to do just to take all the TFLS at once , unless you really need it for something.

With drawdown a rule of thumb is that you can take an inflation adjusted income from the pot that is left of approx 4% pa and in this case the pot will hopefully never run out , even if you live to a ripe old age  if it is properly invested. You could take 5 or 6% although it would increase the risk of the pot eventually running out .

Some people take more from the pension to bridge the gap between retiring and receiving the state pension but clearly this leaves less for later years.