Looking to Protect My 25% Tax-Free Lump Sum

Sugar62

Hi everyone,

I’m hoping to get some views on a pension strategy I’m considering, especially with rumours swirling about possible changes to the 25% tax-free lump sum in the next Budget.

I’ve got a defined contribution pension through my employer, and I’m able to transfer out up to 95% of it without affecting the employer contributions (currently at 9%).

I’m planning to retire in about 4 years, and I’m thinking of doing the following:

• Transfer 95% into a separate personal pension or drawdown pot

• Crystallise that portion now to take the 25% tax-free lump sum

• Leave the rest in drawdown, untouched for now (no taxable withdrawals)

The idea is to lock in the tax-free lump sum under current rules, while keeping flexibility for income planning later.

I’m trying to make sure I haven’t missed anything—like triggering the Money Purchase Annual Allowance, affecting future contributions, or running into any unexpected tax or regulatory issues.

Would really appreciate any thoughts or experiences from others who’ve looked into something similar. Thanks in advance!

QrizB

Sugar62 said:

Hi everyone,

I’m hoping to get some views on a pension strategy I’m considering, especially with rumours swirling about possible changes to the 25% tax-free lump sum in the next Budget.

Generally , it's a terrible idea to make significant financial decisions on the basis of unfounded rumours.
After the last budget there were people trying to reverse their TFLS withdrawals.I think  HMRC said "lol no".

Sugar62 said:

The idea is to lock in the tax-free lump sum under current rules, while keeping flexibility for income planning later.

I’m trying to make sure I haven’t missed anything

What are you going to do with the TFLS once you've taken it?

If you spend it, you're depriving your future self of retirement money. If you invest it, you've lost the tax shelter of a SIPP; you might be able to put some of it onto an ISA, but the allowance is only £20k a year. You're potentially opening yourself up to extra taxation and and added administrative work.

PattiTelongo

Some people need saving from themselves, they really do. Wait for the budget and make decisions based on any announcements rather than what the Tory papers say. 

Dazed_and_C0nfused

Sugar62 said:

Hi everyone,

I’m hoping to get some views on a pension strategy I’m considering, especially with rumours swirling about possible changes to the 25% tax-free lump sum in the next Budget.

I’ve got a defined contribution pension through my employer, and I’m able to transfer out up to 95% of it without affecting the employer contributions (currently at 9%).

I’m planning to retire in about 4 years, and I’m thinking of doing the following:

• Transfer 95% into a separate personal pension or drawdown pot

• Crystallise that portion now to take the 25% tax-free lump sum

• Leave the rest in drawdown, untouched for now (no taxable withdrawals)

The idea is to lock in the tax-free lump sum under current rules, while keeping flexibility for income planning later.

I’m trying to make sure I haven’t missed anything—like triggering the Money Purchase Annual Allowance, affecting future contributions, or running into any unexpected tax or regulatory issues.

Would really appreciate any thoughts or experiences from others who’ve looked into something similar. Thanks in advance!

You do realise that 100% of the remaining pension and 100% of any subsequent growth within that crystallised pot are both taxable when taken out?

Albermarle

There was a lot of similar threads before the last budget, and no doubt will be the same before every subsequent budget. Stoked up by unfounded speculation in certain media outlets unsympathetic to the Govt.

OP - The chance of the 25% tax free cash being removed or reduced is around about zero.
There is a small chance I suppose that the current max limit of £268K could be reduced but pretty unlikely.

Generally , it's a terrible idea to make significant financial decisions on the basis of unfounded rumours.

If you went to a financial advisor, the above would be the answer.

Sugar62

All, thank you for your concerned replies, it’s good to know that people are looking out for each other here.
I have been paying large amount into the pension rather than paying off my interest only mortgage because I’m on a very favourable interest rate. The lump sum was always intended to pay off the mortgage on retirement in 3-4 years.  I don’t plan to do anything until I hear the budget outcome but was getting my action plan ready in case the tax-free sum is reduced to clear the mortgage earlier.

SVaz

What’s your plan should markets crash and fall 20-50% right before you need the tfls to pay off your mortgage?
Hopefully you have the amount ringfenced in safe funds to guard against what is probably a more likely event than the 25% being messed with. 

Silvertabby

Strictly speaking, the maximum tax free cash limit has already been reduced, without too much drama.

It was set at 25% of the Life Time Allowance in 2006, being £1.5m, before increasing to £1.8m and then reducing to the current (notional, for tax free allowance purposes) little over £1m.

Any further reductions will get some very senior civil servants twitching.  Which is why my gut feeling is that it won't happen.  But, who knows.

Also, reducing the maximum tax free cash may mean extra revenue for the treasury in the short term, but would have the long term effect of increasing the overall costs of the non funded public sector schemes.  

QrizB

For the OP the most relevant reply is this:

SVaz said:

What’s your plan should markets crash and fall 20-50% right before you need the tfls to pay off your mortgage?
Hopefully you have the amount ringfenced in safe funds to guard against what is probably a more likely event than the 25% being messed with. 

Now might be a good time to de-risk enough of your pension to pay off your mortgage. Without knowing the size of the pension or of the mortgage it's difficult to say more, but there are various options open to you.

Sugar62

SVaz and QrizB you make valid points and I haven’t made any provisions. My company pension provider said that they move my pension into low risk funds as I get closer to retirement.  

I will go back and check.
i could push back retirement however I will start thinking about de-risking some of it … perhaps take 25% of half of my DC for now but definitely needs more thought.
thank you!

kempiejon

One can avoid MPAA using the small pots rules and extract up to £30k; 25% tax free, the balance at ones prevailing rate.