How to access defined contribution pension pots

wavecloud

Hi,

I just turned 55 last week and I have some basic questions about how to access my pension.

I have a number of defined contribution pension accounts spread over four pension companies.  I've gathered them through working for various companies.  I am still working, so money is still paid into one of those accounts but no further contribution is made into remaining accounts.

I would like to access some funds for house renovation this year, but I am confused as to how I should go about it.  A lot of websites talk about being able to access 25% tax free but none of them have explained to me the details of how that works.  

1. Let's say I have £100,000 in one of the accounts that no further contribution is being made to.  If I take £10,000 (ie.10%), does that count as taking 10% out of 25% tax-free lump sum, so I pay no tax?  Or is it that out of £10,000, 25% (ie. £2,500) is tax-free and I have to pay tax for £7,500?

2. If it's the former (ie. it counts as taking 10% of 25%), then what happens to the remaining 15% tax free amount?  It is £15,000 today but if I access the remaining 15% in 10 years' time, it may have grown to £20,000.  Do I get £15,000 or £20,000 tax free then?  Or is it that once I access any tax-free lump sum (whether it be 5% or 25%), the remaining amount does not get invested any further and I only have option to draw down from it?

3. I am a bit confused about MPAA triggering.  As I will work for (probably) another 5 years or so, I need to ensure that I don't lose tax benefits.  If I take 25% lump sum now, does that mean I end up paying more tax?

Sorry if this is really basic questions, but I can't get a definitive answer anywhere.

Marcon

wavecloud said:

Hi,

I just turned 55 last week and I have some basic questions about how to access my pension.

I have a number of defined contribution pension accounts spread over four pension companies.  I've gathered them through working for various companies.  I am still working, so money is still paid into one of those accounts but no further contribution is made into remaining accounts.

I would like to access some funds for house renovation this year, but I am confused as to how I should go about it.  A lot of websites talk about being able to access 25% tax free but none of them have explained to me the details of how that works.  

1. Let's say I have £100,000 in one of the accounts that no further contribution is being made to.  If I take £10,000 (ie.10%), does that count as taking 10% out of 25% tax-free lump sum, so I pay no tax?  Or is it that out of £10,000, 25% (ie. £2,500) is tax-free and I have to pay tax for £7,500?

2. If it's the former (ie. it counts as taking 10% of 25%), then what happens to the remaining 15% tax free amount?  It is £15,000 today but if I access the remaining 15% in 10 years' time, it may have grown to £20,000.  Do I get £15,000 or £20,000 tax free then?  Or is it that once I access any tax-free lump sum (whether it be 5% or 25%), the remaining amount does not get invested any further and I only have option to draw down from it?

3. I am a bit confused about MPAA triggering.  As I will work for (probably) another 5 years or so, I need to ensure that I don't lose tax benefits.  If I take 25% lump sum now, does that mean I end up paying more tax?

Sorry if this is really basic questions, but I can't get a definitive answer anywhere.

There are definitive answers galore, but the problem in pensions is matching them with your questions! Have a look at https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise/pension-pot-options which should help. So too might a free 'guidance' appointment with Pensionwise: https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise

molerat

There are many ways of withdrawing from a pension. You can take just a tax free sum or a combination with 25% tax free and 75% taxable.  If you take any taxable cash you will be limited to contributing a max of £10K per year to a DC pension, taking tax free cash does not affect this.  If you say take £10K tax free from a £100K pot then a further £30K, which including any future growth is taxable, will be crystallised and held separately, even if virtually, from the remainder of the £60K untouched pension so a further £15K, plus any growth, tax free is available. 

bjorn_toby_wilde

Using your example

1. If you request the £10k as a TFLS then the pension provider will pay that to you and £30k of the remainder will be “crystallised”. It will continue to be invested and hopefully grow but, when you draw it, all of it including the growth will be subject to income tax at your marginal rate.

2. The remaining £60k will be uncrystallised and when you choose to draw it you can take 25% of whatever it’s worth at that point tax free.  If it grows to say £80k then £20k will be tax free.

3. If you don’t want to trigger the MPAA then just take the tax free lump sum, not taxable income.

Albermarle

wavecloud said:

Hi,

I just turned 55 last week and I have some basic questions about how to access my pension.

I have a number of defined contribution pension accounts spread over four pension companies.  I've gathered them through working for various companies.  I am still working, so money is still paid into one of those accounts but no further contribution is made into remaining accounts.

I would like to access some funds for house renovation this year, but I am confused as to how I should go about it.  A lot of websites talk about being able to access 25% tax free but none of them have explained to me the details of how that works.  

1. Let's say I have £100,000 in one of the accounts that no further contribution is being made to.  If I take £10,000 (ie.10%), does that count as taking 10% out of 25% tax-free lump sum, so I pay no tax?  Or is it that out of £10,000, 25% (ie. £2,500) is tax-free and I have to pay tax for £7,500? It depends on what you request from the provider and what flexibility they offer. Older pensions can be restrictive on withdrawal option.

2. If it's the former (ie. it counts as taking 10% of 25%), then what happens to the remaining 15% tax free amount?  It is £15,000 today but if I access the remaining 15% in 10 years' time, it may have grown to £20,000.  Do I get £15,000 or £20,000 tax free then?  Or is it that once I access any tax-free lump sum (whether it be 5% or 25%), the remaining amount does not get invested any further and I only have option to draw down from it? You need to understand the concepts of uncrystallised and crystallised pension pots. Then it will all be clear.

3. I am a bit confused about MPAA triggering.  As I will work for (probably) another 5 years or so, I need to ensure that I don't lose tax benefits.  If I take 25% lump sum now, does that mean I end up paying more tax?

Sorry if this is really basic questions, but I can't get a definitive answer anywhere.

As well as taking up the Pensionwise option mentioned above, regular reading of this forum will most likely improve your knowledge about pension withdrawal options and investment strategies .

GunJack

Another way may be to take the 25% tfc, keep the 10k you want and put the other 15k into a s&s ISA, mirroring the investments in your pension (so similar returns) but then that ISA can be drawn on with no further tax payable... It really depends on what you want to achieve.

Triumph13

Just to add that you may need to transfer the pension fund you are accessing to a SIPP, or private pension, as the first step.  Many old employer schemes will not offer the full range of withdrawal options.  You also need to be very clear exactly what it is you want to do when talking to the pension people ie "crystallise £40k of my pension, take the 25% TFLS of £10k and leave the remaining crystallised funds untouched so as not to trigger the MPAA"