Pension Lump Sum Tax

Albermarle

However for my wife's pension we want to maximise her lump sum. Partly because we are moving house and partly because we want to make the most of the next few years before the country completely disappears down the plug hole. 

The first reason to take the lump sum is a valid one, but not sure about the second.....

squidley

Dazed and Confused- thanks. I will have a read.

Albemarle - although I expressed it in a rather flippant tone we are extremely concerned about the way things are heading. We are very keen, all year round, caravanners. It's a big part of our life.  And we fully intend to spend as much time as possible touring abroad. The cost of a decent tow car has rocketted. And will only get worse as the insanity of "net zero" approaches. We think it is better to have the money now. 

squidley

We now have firm plans for my wife to retire next January, or early February at the latest. We are all set to take the full DB pension and the tax free lump sum part of the DC pension as soon as she leaves. So that will leave her approx £30k in her DC pot to take out at a later date. 

Can I just confirm that at the start of the next tax year (2024/2025) she can take out another 25% of the 30k tax free?

Thanks. 

Dazed_and_C0nfused

squidley said:

We now have firm plans for my wife to retire next January, or early February at the latest. We are all set to take the full DB pension and the tax free lump sum part of the DC pension as soon as she leaves. So that will leave her approx £30k in her DC pot to take out at a later date. 

Can I just confirm that at the start of the next tax year (2024/2025) she can take out another 25% of the 30k tax free?

Thanks. 

What makes you think you can more than one TFLS?

If she crystallises 100% of her DC pension by in January/February next year and takes the 25% TFLS then there won't be any further TFLS available from that pension.

Anything taken from the £30k will be taxable income.  And if the £30k grows to say £40k the whole £40k would be taxable (when taken out of the pension).

NB.  New contributions would create a new pot from which 25% TFLS could be taken.

Pat38493

squidley said:

We now have firm plans for my wife to retire next January, or early February at the latest. We are all set to take the full DB pension and the tax free lump sum part of the DC pension as soon as she leaves. So that will leave her approx £30k in her DC pot to take out at a later date. 

Can I just confirm that at the start of the next tax year (2024/2025) she can take out another 25% of the 30k tax free?

Thanks. 

No that's not how it works - you can only take 25% tax free cash once.  If you have £100K pension and you take £25K tax free, the other £75K is then "crystallized" and therefore fully taxable on withdrawal - changing the tax year does not change this.

Note - if you only took £10K tax free, then you would be left with £30K in crystallized drawdown and £60K that is still not crystallized, so you could then take the other £15K tax free (plus any growth amounts on that 60K) later on.

squidley

Thank you all for your very helpful comments.  

My wife is now all set to retire early in the new year. Maximum DB lump sum, reduced monthly pension, and the DC pension pot to be taken as an UFPLS over two consecutive tax years. This will keep her in the 20% tax band. 

One further question if I may. In the UFPLS notes of her pension quotation it states:

As a result of flexibly accessing your DC pension pot you will be subject to the money purchase annual allowance (MPAA). 

It says the MPAA is £4k. I've never heard of this before. Is it possible this could affect my wife's pension payment?

Thanks. 

molerat

The MPAA is a limit on how much you can pay into a DC scheme.  That info is out of date and the limit is now £10K pa but still limited to having a relevant income.

squidley

Thank you Molerat. 

jamesd

You're moving house. Why not take a higher mortgage and pay it with the higher pension income instead of taking the lump sum directly from the pension?

I assume the pension gets regular inflation increases and the mortgage debt doesn't. You could go with a retirement interest only mortgage and do capital paying only after some years of pension increases, it at all. With a view to either more lump sum or keeping some of the higher income.

There's a decent chance that this will get you more lump sum for your money and the mortgage borrowing is 100% tax free.

So far as her DC pot goes, she's still able to pay in up to her gross pay or up to £3,600 gross if higher. The 25% tax free bit makes you at least 6.25% gain on the money if taxed at basic rate on the way out. It's usually a good use for savings.