Tax free lump sum DC pension

Sunsh1ne54

Hi 

Is there any reason it wouldn’t be a good idea to withdraw my quarter tax free from my DC pension pot while still working and paying into the plan?

I intend to retire in the next couple of years.  I have other savings but don’t want to withdraw from those.

The money is for a new or more up to date car.

It’ll be really helpful to hear everyone’s thoughts on this. 

Thanks

PS My current car is 16 years old 

Marcon

Sunsh1ne54 said:

Hi 

Is there any reason it wouldn’t be a good idea to withdraw my quarter tax free from my DC pension pot while still working and paying into the plan?

I intend to retire in the next couple of years.  I have other savings but don’t want to withdraw from those.

The money is for a new or more up to date car.

It’ll be really helpful to hear everyone’s thoughts on this. 

Thanks

PS My current car is 16 years old 

Depends what your other savings are - do they have the same tax-sheltered environment as your pension?

Why do you think your pension is the best way to fund your purchase of a more up to date car - there may be more effective ways to finance the purchase which are worth exploring - possibly even a loan. 

Remember too that your pension is there for later life and you're effectively robbing your retirement years to fund a 'today' purchase.

If you've not explored the possibilities, then don't just opt for what looks like the easiest, when it may not help you longer term.

Sunsh1ne54

Marcon said:

Sunsh1ne54 said:

Hi 

Is there any reason it wouldn’t be a good idea to withdraw my quarter tax free from my DC pension pot while still working and paying into the plan?

I intend to retire in the next couple of years.  I have other savings but don’t want to withdraw from those.

The money is for a new or more up to date car.

It’ll be really helpful to hear everyone’s thoughts on this. 

Thanks

PS My current car is 16 years old 

Depends what your other savings are - do they have the same tax-sheltered environment as your pension?

Why do you think your pension is the best way to fund your purchase of a more up to date car - there may be more effective ways to finance the purchase which are worth exploring - possibly even a loan. 

Remember too that your pension is there for later life and you're effectively robbing your retirement years to fund a 'today' purchase.

If you've not explored the possibilities, then don't just opt for what looks like the easiest, when it may not help you longer term.

My main pension will be a DB plan, my DC plan is my top up, so i would likely use the TFLS towards a car at retirement if not before. Other savings are in Premium Bonds and similar. 

Sunsh1ne54

Veteransaver said:

Taking a lump sum now will restrict future pension contributions (to only £4k a year I think)

And once you trigger it you have to move the pension into a Sipp or annuity within 6 months believe.

I didn’t realise the £4k part… thanks 

leosayer

Veteransaver said:

Taking a lump sum now will restrict future pension contributions (to only £4k a year I think)

And once you trigger it you have to move the pension into a Sipp or annuity within 6 months believe.

Incorrect. 

Taking lump sums has no such effect. Only taking income from a pension pot does that - Google MPAA.

In reply to the OP, I've nothing to add to what Marcon said.

 

DE_612183

So if I take a £20k lump sum thats fine, but if I take £100 a month, my contributions then get capped at £4k PA?

MallyGirl

The MPAA cap is now £10k but it does not apply to DB pension contributions. Rather than figures you should think about the type of withdrawal.
Taking any size of tax free lump sum does not trigger MPAA
taking just 1 penny of taxable income (ie the 75% after the 25% tax free has gone) will trigger MPAA

Sunsh1ne54

leosayer said:

Veteransaver said:

Taking a lump sum now will restrict future pension contributions (to only £4k a year I think)

And once you trigger it you have to move the pension into a Sipp or annuity within 6 months believe.

Incorrect. 

Taking lump sums has no such effect. Only taking income from a pension pot does that - Google MPAA.

In reply to the OP, I've nothing to add to what Marcon said.

 

Ah good, I don’t intend drawing a pension 

LHW99

MallyGirl said:

The MPAA cap is now £10k but it does not apply to DB pension contributions. Rather than figures you should think about the type of withdrawal.
Taking any size of tax free lump sum does not trigger MPAA
taking just 1 penny of taxable income (ie the 75% after the 25% tax free has gone) will trigger MPAA

And its the "tax free" bit that matters. You would request the tax-free amount, and then 3 x that would become "crystallised" and would be taxable in future.

So if you had £200k in the pension, and took a £25k tax-free sum for the car, you would be left (in the DC pension) with:

£75k crystallised money - all potentially taxable

£100k uncrystallised, from which you could take another £25k rax free at a later date.

What is in the pension would continue to grow tak free, but even if the crystallised amount grew to £100k, it would still all be taxable. If the uncrystallised grew to £120k, you would then be able to have an additional 25% of that (£30k) tax free.

If you take £1 of the taxable part, then you get caught by the MPAA

Albermarle

Veteransaver said:

Taking a lump sum now will restrict future pension contributions (to only £4k a year I think)

And once you trigger it you have to move the pension into a Sipp or annuity within 6 months believe.

This post is totally Inaccurate on both points. Just in case anybody else reads it.

jamesd

Veteransaver said:

Taking a lump sum now will restrict future pension contributions (to only £4k a year I think)

And once you trigger it you have to move the pension into a Sipp or annuity within 6 months believe.

@Veteransaver, wrong on all counts but there are elements that aren't without basis.

Lump sums can be taken in different ways and one of those, called UFPLS,  will trigger the MPAA. Some very restrictive pensions might only offer that way and the solution to that is to transfer somewhere else. UFPLS is 25% tax free and 75% taxable and both parts must be taken at the same time.

Alternative ways that do not trigger the MPAA are:
1. Small pot rule. All of a pot worth up to £10k taken up to three times in your life. 25% tax free, 75% taxable, both parts taken at the same time.
2. Taking 25% tax free from all or part of a pot and placing the 75% into a flexi-access drawdown pot to be taken later as 100% taxable when taken. The 25% doesn't trigger the MPAA, drawing taxable money from the 75% does unless buying an annuity with it. This is what the original question is about.

Some pensions do have restrictions on annuity buying or moving when taking the 25% tax free lump sum but it can be to an ordinary personal pension, not necessarily the SIPP type. Generally older ones and not present in recent products. Transferring would remove the restrictions.