Argh - think I misunderstood tax on lump sums.

ThisIsWeird

Hi.
I have this wee pension, started when I were a lad, to which I then stopped contributing, so is now only worth around £41k. Ok, I shouldn't sneer at ~£200pm, as it'll cover energy bills and stuff, but I'd rather have the cash.
I thought I understood the 25% rule, but now reckon I haven't. Could someone clarify, please?
I thought it meant that I could withdraw up to 25% of the whole sum tax free, each tax year. So, I could withdraw ~£10k in the first year, tax free (25% of 40k) leaving ~£30k, £7.5k in the second year (25% of the remaining £30k), leaving £22.5k etc etc.
But I fear it actually means that whatever sum I withdraw as a lump sum, only 25% of it will be tax free? So, if I withdraw that same £10k in the first year, only 25% of that £10k will be TF, and I'll be taxed on the remaining 75%? Etc etc.
Ta. 

Sarahspangles

ThisIsWeird said:

Hi.
I have this wee pension, started when I were a lad, to which I then stopped contributing, so is now only worth around £41k. Ok, I shouldn't sneer at ~£200pm, as it'll cover energy bills and stuff, but I'd rather have the cash.
I thought I understood the 25% rule, but now reckon I haven't. Could someone clarify, please?
I thought it meant that I could withdraw up to 25% of the whole sum tax free, each tax year. So, I could withdraw ~£10k in the first year, tax free (25% of 40k) leaving ~£30k, £7.5k in the second year (25% of the remaining £30k), leaving £22.5k etc etc.
But I fear it actually means that whatever sum I withdraw as a lump sum, only 25% of it will be tax free? So, if I withdraw that same £10k in the first year, only 25% of that £10k will be TF, and I'll be taxed on the remaining 75%? Etc etc.
Ta. 

Assuming it is a defined contribution pension, yes you can withdraw 25% of it tax free, but the remaining 75% will be taxed at whatever rate of tax you’re paying at the time.

I say ‘assuming it is a defined contribution’ as sometimes people don’t realise they actually have a defined benefit pension. Most of those will have a similar lump sum option when they commence.

If it is a defined contribution pension and you have a year you’re not working, but not drawing other pensions including the state pension, you would be able to take out quite a bit tax free. You can have £12,570 of the taxable bit and the 25% tax free that goes with it. £16,760 in today’s terms.

HappyHarry

ThisIsWeird said:

Hi.
I have this wee pension, started when I were a lad, to which I then stopped contributing, so is now only worth around £41k. Ok, I shouldn't sneer at ~£200pm, as it'll cover energy bills and stuff, but I'd rather have the cash.
I thought I understood the 25% rule, but now reckon I haven't. Could someone clarify, please?
I thought it meant that I could withdraw up to 25% of the whole sum tax free, each tax year. So, I could withdraw ~£10k in the first year, tax free (25% of 40k) leaving ~£30k, £7.5k in the second year (25% of the remaining £30k), leaving £22.5k etc etc.
But I fear it actually means that whatever sum I withdraw as a lump sum, only 25% of it will be tax free? So, if I withdraw that same £10k in the first year, only 25% of that £10k will be TF, and I'll be taxed on the remaining 75%? Etc etc.
Ta. 

You can withdraw 25% of the total as tax-free cash. 

It is not 25% per tax year.

If your plan allows it, you could draw ~£10,000 tax-free cash in year one, and then all further withdrawals would be taxable.

Or, again if your plan allows it, you could draw say £5,000 tax-free cash in year one, leaving ~£5000 tax-free cash (depending on market movements) to draw in later years. 

DRS1

The 25% TFLS is a one off not per tax year.
So you could withdraw £10 out of £40k tax free in year one but then the remaining 30K would be taxable at your marginal rate when you withdraw it in years 2 3 and 4.
Or you can do UFPLS which is what you describe in your last paragraph.  Withdraw £10k pa and 2500 is tax free and 7500 is taxable.  If your 30K grows in years 2,3 and 4 then you may get a bit more tax free lump sum that way.  (Or less if the £30K goes down)

Marcon

ThisIsWeird said:

Hi.
I have this wee pension, started when I were a lad, to which I then stopped contributing, so is now only worth around £41k. Ok, I shouldn't sneer at ~£200pm, as it'll cover energy bills and stuff, but I'd rather have the cash.

Are you sure you have option to take 25% tax free cash? If this quite an elderly pension scheme(!) it could be well be a defined benefit scheme - and your reference to £200pm suggests that's what it might be.

If so, you can take a tax free lump sum at the time your benefits from the scheme come into payment but the scheme rules will dictate the maximum cash you can take (with an overall limit set by HMRC).

SVaz

You can either take the whole 25% or say 5% tax free cash per year x 5 ,  which will give you slightly more cash, depending on how it’s invested but on £10k it won’t be much. 

Scrounger

@ThisIsWeird

Who is is pension with?

Is it a 'SERPS' type pension from the early 80's - if so it could have some valuable guarantees eg GAR (Guaranteed Annuity Rate)?


Scrounger

Albermarle

so is now only worth around £41k. Ok, I shouldn't sneer at ~£200pm

As mentioned in other posts, you have generated some questions about what sort of pension it is.

A Defined Contribution pension is basically a pot of money, such as £41K

A Defined benefit pension promises an annual income, such as £2400 pa .

Which is it ?( this link might help ) 

Pension basics | Help with pension basics | MoneyHelper

ThisIsWeird

Thank you, everyone.

I can clarify - it's a Defined Contribution (money purchase) plan with Phoenix (started off with Hill Samuel, many moons ago).

I can see now that many of the options - such as taking it in a number of lump sums - will require it to be transferred to another plan by Phoenix or another provider.

The one thing that's still unclear to me is whether - if I did transfer - I'd be able to take a lump sum, each year, tax-free, up to a max of 25% of the remaining sum, until it's all gorn? Does anyone know, or do I need to contact Phoenix or others to ask?

All I can seemingly do with my current DC-MP as it stands, ie without transferring it, is cash it all in (£29,141 after 75% of the sum has been taxed - so nope), take it all as an annuity (£222pm), or a tax-free £10k out, and the rest as an annuity (£166pm).

Anything else - a series of lump sums until exhausted - requires a transfer.

I'm minded to do £10k out and £166pm pension.

Another wee complicating factor is that I think I have another teeny pension sitting somewhere, prob around £15k, so it might make sense to amalgamate them both in a single package?

Does anyone know if there is a pension provider that will allow tax-free cash sums of up to 25% out each year? Thanks.

QrizB

ThisIsWeird said:

The one thing that's still unclear to me is whether - if I did transfer - I'd be able to take a lump sum, each year, tax-free, up to a max of 25% of the remaining sum, until it's all gorn? Does anyone know, or do I need to contact Phoenix or others to ask?

No, the answer is no, several people int his thread have already said no.

Sarahspangles said:

Assuming it is a defined contribution pension, yes you can withdraw 25% of it tax free, but the remaining 75% will be taxed at whatever rate of tax you’re paying at the time.

and

DRS1 said:

The 25% TFLS is a one off not per tax year.

and

HappyHarry said:

You can withdraw 25% of the total as tax-free cash. 
It is not 25% per tax year.

and

SVaz said:

You can either take the whole 25% or say 5% tax free cash per year x 5 ,  which will give you slightly more cash, depending on how it’s invested but on £10k it won’t be much. 

So the answer is no.

The "taking a number of lump sums" section that you've highlighted is quite clear; if you take a series of UFPLS lump sums, 25% of that lump sum is tax-free and 75% is taxable.

ThisIsWeird

QrizB said:

ThisIsWeird said:

The one thing that's still unclear to me is whether - if I did transfer - I'd be able to take a lump sum, each year, tax-free, up to a max of 25% of the remaining sum, until it's all gorn? Does anyone know, or do I need to contact Phoenix or others to ask?

No, the answer is no, several people int his thread have already said no.

No.

The "taking a number of lump sums" section that you've highlighted is quite clear; if you take a series of UFPLS lump sums, 25% of that lump sum is tax-free and 75% is taxable.

You have completely ignored the fact that I am stupid.

But Citizen's Advice makes it stupid-clear - it gives examples:

Thanks all. £10k and a pension it is, then. Probably.