Question about 25% tax free lump sum

MedGuy

Hi all,

Sorry if this has been asked before but I'm confused about the tax free lump sum after watching Martin's show this week.

I was under the impression that at 57, I could take 25% out of my private work pension and it would be tax free. After watching the show, it appears I would pay tax on most of that lump sum.

EG There is 100k in the pot. I could take 25k (25%) but as a high rate tax payer, only 25% would be tax free (£6250). I would need to pay 40% tax on the remaining £18750 (£7500)

So my "tax free" £25k lump sum require £7500 tax payment.

Is that correct?

Many thanks in advance.

QrizB

There are several types of lump sum that can be taken from a Defined Contribution pension - one with a pot of money.

Tax free lump sums are tax free. You can only take 25% of your pension this was, in one lump or several.

If you take an uncrystallised funds pension lump sum (UFPLS), only 25% of it is tax free. You can take as much of your pension as you want this way, even all of it.

Which sort of lump sum were you hoping to take?

SVaz

If you want £25k of the £100k completely tax free,  you crystalise the whole amount and the 75% left behind is forever taxable.
 

If you took £25k as UFPLS then 25% of it is tax free, the rest taxable AND you are restricted to £10000 gross contributions going forward, which may be a problem if you + your employer contributes a good amount. 

MedGuy

Thanks for your reply.

I have a work pension that I am still paying into. I was under the impression I could take 25% tax free at the age of 57 (as the age goes up from 55). That is the only payment I would take until I reach retirement age.

My confusion from the chocolate swiss role explanation is that it suggests only a quarter of that 25% lump sum would be tax free.

SVaz

No,  you can choose to only take tax free cash and it doesn’t restrict your future contributions to £10k ( the MPAA). 

You could take any amount up to 25% tax free,  if you wanted,  you could crystalise £40k in order to have £10k tax free, for example. 

I took £17000 tax free from my pension in 2021,  which was 18% of that pot at the time, so I still have 7% tax free cash left to take. 

MedGuy

Thank you for your help!

QrizB

This does all assume that you've got a modern pension that allows you all the options when it comes to withdrawals.

Older pensions (anything from the last century, and quite a few from before the mid-2010s) might only offer restricted options. If you've got one of those, you might have to move it elsewhere.

DRS1

I have a work pension that I am still paying into. I was under the impression I could take 25% tax free at the age of 57 (as the age goes up from 55). That is the only payment I would take until I reach retirement age.

Best to check that your scheme allows that for someone who is still contributing to it.

Albermarle

MedGuy said:

Thank you for your help!

Just remember that 'tax free cash' is exactly that.

dunstonh

I suspect the segment was referring to UFPLS withdrawals rather than income drawdown withdrawals.

UFPLS requires you to take the 75% taxable element at the same time as the 25% tax free.     So, whilst 25% is tax free, the 75% would be taxable.

Income drawdown allows you to access the 25% tax free cash without the need to access the 75% element unless you want to.

MallyGirl

MedGuy said:

Thanks for your reply.

I have a work pension that I am still paying into. I was under the impression I could take 25% tax free at the age of 57 (as the age goes up from 55). That is the only payment I would take until I reach retirement age.

your work pension may not support you doing this as an active member