Maximum tax free lump sum

tryingtounderstandfinance

Thanks for everyone’s comments, certainly food for thought. 

One thing I’m still not clear about and I’ll try rephrasing my original query - how does the tax free lump sum apply across a combination of DB and DC pensions? Is it the total across all pensions that’s limited to £268,000 /25% (whichever is the lower figure)? 

Many thanks

hugheskevi

tryingtounderstandfinance said:

One thing I’m still not clear about and I’ll try rephrasing my original query - how does the tax free lump sum apply across a combination of DB and DC pensions? Is it the total across all pensions that’s limited to £268,000 /25% (whichever is the lower figure)? 

Each individual arrangement has a maximum permitted tax free cash amount - 25% in the case of DC schemes, and the maximum permitted under scheme rules in the case of DB, which is broadly 25% of the value.

The total amount of tax free cash you can take summed across all schemes is limited to £268,275.

Each time you take tax free cash from any pension, the cumulative amount you have taken increases, and once you reach £268,275 you cannot take any more tax free. Hence you need to plan from where you want to take the tax free cash.

Perhaps worth noting the £268,275 limit is frozen in cash terms and there is no indication it will be increased. That could give an incentive to take some of the DC lump sum early, if, for example, you were then going to put it in ISAs. That way the growth wouldn't count toward the £268,275 limit whereas if left in a pension it will.

Flugelhorn

MallyGirl said:

tryingtounderstandfinance said:

Thanks, that’s helpful and something I’ll ponder. At this stage I plan to continue some (limited) work as I enjoy it and find it intellectually stimulating/challenging. And it’s well paid and can be very flexible as to how much I do. But I may of course change my mind about carrying on for so long! 

My father thought this way until he realised that the professional fees/insurance etc took a huge chunk of his couple of days a month income.

I agree with that - insurance has got better for many though professional fees / requirements to remain on registers etc can be trying 

Albermarle

Two of my team are in their late 60’s and never mention retirement despite being financially secure. They both do a very good job.

Maybe they just do not fancy being stuck at home with their OH's every day !

squirrelpie

hugheskevi said:

Perhaps worth noting the £268,275 limit is frozen in cash terms and there is no indication it will be increased. That could give an incentive to take some of the DC lump sum early, if, for example, you were then going to put it in ISAs. That way the growth wouldn't count toward the £268,275 limit whereas if left in a pension it will.

As long as you only take tax-free money from a DC pension, otherwise you reduce the amount you can contribute to DC pensions in the future. Historically it might also have been a poor idea from an IHT viewpoint, although that seems likely to stop being an issue soon.

Cobbler_tone

Albermarle said:

Two of my team are in their late 60’s and never mention retirement despite being financially secure. They both do a very good job.

Maybe they just do not fancy being stuck at home with their OH's every day !

Pretty much a fact, with added duties with grandkids. 

Marcon

squirrelpie said:

hugheskevi said:

Perhaps worth noting the £268,275 limit is frozen in cash terms and there is no indication it will be increased. That could give an incentive to take some of the DC lump sum early, if, for example, you were then going to put it in ISAs. That way the growth wouldn't count toward the £268,275 limit whereas if left in a pension it will.

As long as you only take tax-free money from a DC pension, otherwise you reduce the amount you can contribute to DC pensions in the future. Historically it might also have been a poor idea from an IHT viewpoint, although that seems likely to stop being an issue soon.

Only if you access a DC pension 'flexibly'. If you take tax free cash and use the balance to buy a whole life annuity, then it isn't triggered. Nor is it triggered if you take funds from a DC pension using the 'small pots' regime - see https://www.litrg.org.uk/pensions/pension-withdrawals/small-pensions (and the 25% tax free cash in each small pot is in addition to the £268,285).