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Help please with understanding the Lump Sum Allowance

Hello everyone. 

Years ago I took a quarter of my pension tax free. Let’s say that was £10K for the purposes of my question. I now have put the remaining 75% into drawdown so I can take a regular income. That will all be subject to tax as I have already had my 25% tax free. That’s understood. My question relates to the illustration I have been sent, it shows my ‘estimated Lump Sum Allowance’ as £8.5K. Given I have had £10K tax free, can anyone explain why the figure on the illustration is lower? And if correct, do I now have more tax free money available to take than I thought?

Comments

  • For completeness the exact wording is ‘estimated lump sum allowance used on this plan at the start date’ so does seem to refer to my initial lump sum withdrawal. 
  • dunstonh
    dunstonh Posts: 118,602 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    My question relates to the illustration I have been sent, it shows my ‘estimated Lump Sum Allowance’ as £8.5K. Given I have had £10K tax free, can anyone explain why the figure on the illustration is lower?
    It says estimate.  Estimate means it is not the actual figure.  Maybe its an LTA conversion rather than using the monetary amount but as the transaction doesn't involve further tax free cash, it doesn't matter and they are happy to use an estimate.

    And if correct, do I now have more tax free money available to take than I thought?
    no.




    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • How many 'years ago' did you take the 25% tax free cash?

    My bet is that you have received a computer generated letter, and that the £8.5K mentioned is 25% of your remaining 'pot'.

    In an ideal world, this letter would have been checked before issue, the earlier 25% payment noted, and the reference to £8.5K deleted.....

    Will probably be picked up at the final, more vigorous, checking stage.  In the meantime no, you can't take any more tax free cash.
  • hugheskevi
    hugheskevi Posts: 4,351 Forumite
    Part of the Furniture 1,000 Posts Photogenic Name Dropper
    edited 2 October 2024 am31 10:51AM
    Years ago I took a quarter of my pension tax free. 
    How many years ago? Was it in 2015/16 or earlier?

    If it was, say, 2015/16 then the Lifetime Allowance was £1.25m rather than the £1.0731m it was when the Lifetime Allowance ceased.

    The Lifetime Allowance usage in 2015/16 would have been £40,000 / £1.25m = 3.2%.

    When the Lump Sum Allowance usage arising from the past crystalisaiton was calculated, it was 3.2% / 4 = 0.8% and 0.8% x £1,073,100 = £8,584.80.

    I think your situation may be similar to the example at this link used for "Mia." If so, you would benefit from higher available Lump Sum Allowance than you were expecting for future relevant benefit crystallisations as a result of the standard calculation, but cannot take any more tax-free income from the already crystallised pension.
  • Thanks all for your replies. To be clear, the figures I gave are not the actual sums involved, I was just using them to make the point that the estimate was lower than the actual figure. I guess I am a bit confused by the use of an estimate when the provider here knows exactly how much tax free money I have received as it was paid by them to me in 2018. I have other pensions, so the question for me becomes what figure do I quote when I have to declare how much tax free money I have received so far, the actual figure or the estimate? I guess I know the answer to that but I was curious if there was some kind of quirk with all the changes to legislation that means I have somehow been given additional tax free allowance. 
  • Just to add I crystallised the entire pot in 2018, taking 25% as a tax free lump sum and putting the rest into a drawdown pot. It’s only now I have started to drawdown the 75%. So my illustrations show all income from drawdown as subject to tax, as expected. I have worked out the estimate as a % of the various LTA’s in place at different times etc but cannot find anything that would explain the discrepancy. It’s probably just as has been suggested a computer generated estimate and I should just ignore it. 
  • Your second question is different to your first question. 

    When you have to declare how much tax-free money you’ve received, declare how much tax-free money you’ve received. 
  • soulsaver
    soulsaver Posts: 6,399 Forumite
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    edited 7 October 2024 am31 11:22AM
    I thought that if someone takes their 25% TFLS, it ring fences the 75% value as taxable, but subsequent growth would available for additional TFLS? Is that not the case?
  • MallyGirl
    MallyGirl Posts: 7,092 Senior Ambassador
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    soulsaver said:
    I thought that if someone takes their 25% TFLS, it ring fences the 75% value as taxable, but subsequent growth would available for additional TFLS? Is that not the case?
    no it is not the case. That 75% is taxable whether it has halved or doubled in size.
    I’m a Senior Forum Ambassador and I support the Forum Team on the Pensions, Annuities & Retirement Planning, Loans
    & Credit Cards boards. If you need any help on these boards, do let me know. Please note that Ambassadors are not moderators. Any posts you spot in breach of the Forum Rules should be reported via the report button, or by emailing forumteam@moneysavingexpert.com.
    All views are my own and not the official line of MoneySavingExpert.
  • Linton
    Linton Posts: 17,938 Forumite
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    soulsaver said:
    I thought that if someone takes their 25% TFLS, it ring fences the 75% value as taxable, but subsequent growth would available for additional TFLS? Is that not the case?
    As soon as you take the 25% the 75% becomes "crystalised" and not available for tax free withdrawals.  In pension discussions you will often see the terms crystalised/uncrystalised used.
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