Advice regarding DB Pensions and 25% Tax FREE

Homeadvice

Good Afternoon All

I believe I know the answer to this question, but I wanted to check this over with someone who may know a little bit more than I do?

I have 4 pension pots currently, Details below.

1) DB Pension worth currently £6k per year, eligible from 2026
2) DP Pension worth currently £1k per year, eligible from 2026
3) DC Pension worth £19k I am able to access this as over 55 years.
4) DC Pension worth £6k I am able to access this as over 55 years.


I am currently considering taking the cash built up in pension 3&4 and had a question in regards to the 25% tax free amount.

Reading online I am led to believe that each pot is calculated separately and as such taking 25% of pot 3 and pot 4 would mean i could take £4,750 & £1,500?

Or would i be able to use the values of 1&2 as they have a value as per the lifetime allowance of £140,000 meaning i could take the full £25,000 from pot 3 and 4 tax free?

Hopefully this makes sense, and thank you in advance for any advice given

Albermarle

You can only ever take 25% tax free from a DC pot. So £4750 and £1,500 .

Homeadvice

Albermarle said:

You can only ever take 25% tax free from a DC pot. So £4750 and £1,500 .

Thanks I thought I had read correctly.

Is it correct that the DB pensions would be taxed alongside my personal tax allowance, 

As I am still working it is likely they would be fully taxed but the first 25% is tax free as a lump sum? 

Brie

Albermarle said:

You can only ever take 25% tax free from a DC pot. So £4750 and £1,500 .

Sorry but this is incorrect.  I took 25% tax free from a DB pot last year.  So you can take 25% from each of the pots.  

tax free is tax free.  Anything beyond that all adds up to be used alongside your personal tax allowance.

xylophone

Sorry but this is incorrect.  I took 25% tax free from a DB pot last year.  So you can take 25% from each of the pots.  

The OP was asking about taking money from his DC pots.

He can take 25% tax free from each.

If he proceeds to make further drawings from each of the DC pensions, those monies will be added to his other taxable income.

With regard to his DB pensions, he needs to have regard to his scheme rules.

Some schemes offer an automatic  tax free lump sum   with an option to take a higher tax free lump sum by commuting part of the pension.

Some  offer either a monthly pension or commutation of part of the pension to create a tax free lump sum and a lower monthly pension.

See

https://techzone.abrdn.com/public/pensions/Tech-guide-tax-free-cash#:~:text=The tax free cash must,(3 + 20/CF)

If he is currently contributing to a DC pension, he should take note of the MPAA if he chooses to take more than the PCLS from the DC pensions.

And any  income over the tax free amounts from  his DB  pensions will be added to his other taxable income.  and taxed at the rate appropriate to his circumstances.

AlanP_2

Homeadvice said:

Albermarle said:

You can only ever take 25% tax free from a DC pot. So £4750 and £1,500 .

Thanks I thought I had read correctly.

Is it correct that the DB pensions would be taxed alongside my personal tax allowance, 

As I am still working it is likely they would be fully taxed but the first 25% is tax free as a lump sum? 

Yes, DB pension INCOME will be taxable and added to your other income to assess tax due after personal allowance.

For the last question, if you mean:

Is 25% of the DB pension payment tax free then the answer is NO.

DB schemes have scheme specific rules about how any tax free lump sum is calculated or even if one is offered at all. They have to stick within HMRC guidelines for the maximum tax free lump sum that can be paid but internal calculations are down to them.

Albermarle

Brie said:

Albermarle said:

You can only ever take 25% tax free from a DC pot. So £4750 and £1,500 .

Sorry but this is incorrect.  I took 25% tax free from a DB pot last year.  So you can take 25% from each of the pots.  

tax free is tax free.  Anything beyond that all adds up to be used alongside your personal tax allowance.

As others have said, you may well have received a tax free lump sum as part of your DB pension starting, but it is a figure calculated by the rules of the pension and certain HMRC rules. It is not 25% of anything.

MallyGirl

Homeadvice said:

Good Afternoon All

I believe I know the answer to this question, but I wanted to check this over with someone who may know a little bit more than I do?

I have 4 pension pots currently, Details below.

1) DB Pension worth currently £6k per year, eligible from 2026
2) DP Pension worth currently £1k per year, eligible from 2026
3) DC Pension worth £19k I am able to access this as over 55 years.
4) DC Pension worth £6k I am able to access this as over 55 years.


I am currently considering taking the cash built up in pension 3&4 and had a question in regards to the 25% tax free amount.

Reading online I am led to believe that each pot is calculated separately and as such taking 25% of pot 3 and pot 4 would mean i could take £4,750 & £1,500?

Or would i be able to use the values of 1&2 as they have a value as per the lifetime allowance of £140,000 meaning i could take the full £25,000 from pot 3 and 4 tax free?

Hopefully this makes sense, and thank you in advance for any advice given

you do also have the option with pension 4 to take the whole thing under the small pots rule as it is under £10k. You would pay tax on 75% of it at your normal rate but it would not trigger the MPAA.

sheslookinhot

Brie said:

Albermarle said:

You can only ever take 25% tax free from a DC pot. So £4750 and £1,500 .

Sorry but this is incorrect.  I took 25% tax free from a DB pot last year.  So you can take 25% from each of the pots.  

tax free is tax free.  Anything beyond that all adds up to be used alongside your personal tax allowance.

25% of what. A DB pension does not have a pot.

Marcon

sheslookinhot said:

Brie said:

Albermarle said:

You can only ever take 25% tax free from a DC pot. So £4750 and £1,500 .

Sorry but this is incorrect.  I took 25% tax free from a DB pot last year.  So you can take 25% from each of the pots.  

tax free is tax free.  Anything beyond that all adds up to be used alongside your personal tax allowance.

25% of what. A DB pension does not have a pot.

25% of the capitalised value of the DB pension. 

Marcon

Albermarle said:

Brie said:

Albermarle said:

You can only ever take 25% tax free from a DC pot. So £4750 and £1,500 .

Sorry but this is incorrect.  I took 25% tax free from a DB pot last year.  So you can take 25% from each of the pots.  

tax free is tax free.  Anything beyond that all adds up to be used alongside your personal tax allowance.

As others have said, you may well have received a tax free lump sum as part of your DB pension starting, but it is a figure calculated by the rules of the pension and certain HMRC rules. It is not 25% of anything.

It could be e.g. the NHS pension scheme maximum tax free cash is 25% of the capitalised value of the benefits (subject to a maximum of £268,275).