Lump sum pension advice

ritch-vtr

Hi guys im just in process of helping my mum sort her pension out.

She's currently 65 and will start receiving state pension from april 2026, she hasn't worked for the last few years and hasn't used up any of her £12570 personal tax free income allowance in this tax year.

If she was to draw her 25% tax free lump some from her pension and also an additional £12570 to use up her tax free allowance for this year's tax year are we correct that she wouldn't pay tax on this additional lump sum? As her pension company as said they would automatically deduct emergency tax on it due to having no tax code and she would have to get in touch with HMRC to recieve a tax refund if she was eligible for 1.

The reason she is looking at doing this is because comes april 2026 her tax free income allowance will be used up by her state pension so any additional income from her private pension will be taxed so she would effectively be saving 20% tax (£2514) by taking the additional lump sum this tax year and its better in her pocket than the government's. 

As any body else done this and are they any complications by doing this ? 

Thanks

Dazed_and_C0nfused

ritch-vtr said:

Hi guys im just in process of helping my mum sort her pension out.

She's currently 65 and will start receiving state pension from april 2026, she hasn't worked for the last few years and hasn't used up any of her £12570 personal tax free income allowance in this tax year.

If she was to draw her 25% tax free lump some from her pension and also an additional £12570 to use up her tax free allowance for this year's tax year are we correct that she wouldn't pay tax on this additional lump sum? As her pension company as said they would automatically tax it and she would have to get in touch with HMRC to recieve a tax refund if she was eligible for 1.

The reason she is looking at doing this is because comes april 2026 her tax free income allowance will be used up by her state pension so any additional income from her private pension will be taxed so she would effectively be saving 20% tax (£2514) by taking the additional lump sum this tax year and its better in her pocket than the government's. 

As any body else done this and are they any complications by doing this ? 

Thanks

She wouldn't need to get in touch with HMRC, they will automatically calculate any refund due next summer/autumn and she can have it transferred into her bank account.

She could also avoid very large tax deductions by taking a smaller taxable payment first ( no more than £1,048) and that should mean, from what you have posted, that she gets a code issued by HMRC and can then take the rest of the taxable income.  It would still be the emergency code (1257L) but on a cumulative basis.

Also, is it possible she has applied for Marriage Allowance?  This would mean her Personal Allowance is only £11,310, not £12,570.

Has she considered just taking a TFLS linked to the taxable element i.e. £16,760 in total, £4,190 TFLS and £12,570 taxable, or does she need the larger amount now?

p00hsticks

ritch-vtr said:

She's currently 65 and will start receiving state pension from april 2026, she hasn't worked for the last few years and hasn't used up any of her £12570 personal tax free income allowance in this tax year.

Has she checked her State Pension forecast to see that she's entitled to the maximum ? 
Check your State Pension forecast - GOV.UK
If not she may be able to boost it by buying additional years, but it would be best for her to do this quickly before she applies for her State Pension to avoid any delay.  

ritch-vtr

Dazed_and_C0nfused said:

ritch-vtr said:

Hi guys im just in process of helping my mum sort her pension out.

She's currently 65 and will start receiving state pension from april 2026, she hasn't worked for the last few years and hasn't used up any of her £12570 personal tax free income allowance in this tax year.

If she was to draw her 25% tax free lump some from her pension and also an additional £12570 to use up her tax free allowance for this year's tax year are we correct that she wouldn't pay tax on this additional lump sum? As her pension company as said they would automatically tax it and she would have to get in touch with HMRC to recieve a tax refund if she was eligible for 1.

The reason she is looking at doing this is because comes april 2026 her tax free income allowance will be used up by her state pension so any additional income from her private pension will be taxed so she would effectively be saving 20% tax (£2514) by taking the additional lump sum this tax year and its better in her pocket than the government's. 

As any body else done this and are they any complications by doing this ? 

Thanks

She wouldn't need to get in touch with HMRC, they will automatically calculate any refund due next summer/autumn and she can have it transferred into her bank account.

She could also avoid very large tax deductions by taking a smaller taxable payment first ( no more than £1,048) and that should mean, from what you have posted, that she gets a code issued by HMRC and can then take the rest of the taxable income.  It would still be the emergency code (1257L) but on a cumulative basis.

Also, is it possible she has applied for Marriage Allowance?  This would mean her Personal Allowance is only £11,310, not £12,570.

Has she considered just taking a TFLS linked to the taxable element i.e. £16,760 in total, £4,190 TFLS and £12,570 taxable, or does she need the larger amount now?

Hi thanks for your reply.

She hasn't applied for marriage tax allowance as they are not eligible due to my dad being in the 40% tax bracket.

No she hasn't considered a TFLS linked to the tax element we didnt know this was possible ? She was under the understanding that any lump sum she would take out first would be be classed as the 25% tax free lump sum which is the reason why she's looking at taking and additional £12570 on top of the 25% TFLS to save on paying income tax next year on it.

They will need the larger amount after april when my dad retires so makes sense to draw it before new tax year.

So basically if she was to draw £1000 out first then she'll get issued a tax code and then apply for the further £11570 it will reduce the complications of awaiting for the tax refunded yea? 

Would she need to draw the 25% tax free lump sum before she did this too ? 

Thanks you really appreciated

ritch-vtr

p00hsticks said:

ritch-vtr said:

She's currently 65 and will start receiving state pension from april 2026, she hasn't worked for the last few years and hasn't used up any of her £12570 personal tax free income allowance in this tax year.

Has she checked her State Pension forecast to see that she's entitled to the maximum ? 
Check your State Pension forecast - GOV.UK
If not she may be able to boost it by buying additional years, but it would be best for her to do this quickly before she applies for her State Pension to avoid any delay.  

Yes we've checked it thanks and all her years is up to date for the maximum 

Thank you

Dazed_and_C0nfused

ritch-vtr said:

Dazed_and_C0nfused said:

ritch-vtr said:

Hi guys im just in process of helping my mum sort her pension out.

She's currently 65 and will start receiving state pension from april 2026, she hasn't worked for the last few years and hasn't used up any of her £12570 personal tax free income allowance in this tax year.

If she was to draw her 25% tax free lump some from her pension and also an additional £12570 to use up her tax free allowance for this year's tax year are we correct that she wouldn't pay tax on this additional lump sum? As her pension company as said they would automatically tax it and she would have to get in touch with HMRC to recieve a tax refund if she was eligible for 1.

The reason she is looking at doing this is because comes april 2026 her tax free income allowance will be used up by her state pension so any additional income from her private pension will be taxed so she would effectively be saving 20% tax (£2514) by taking the additional lump sum this tax year and its better in her pocket than the government's. 

As any body else done this and are they any complications by doing this ? 

Thanks

She wouldn't need to get in touch with HMRC, they will automatically calculate any refund due next summer/autumn and she can have it transferred into her bank account.

She could also avoid very large tax deductions by taking a smaller taxable payment first ( no more than £1,048) and that should mean, from what you have posted, that she gets a code issued by HMRC and can then take the rest of the taxable income.  It would still be the emergency code (1257L) but on a cumulative basis.

Also, is it possible she has applied for Marriage Allowance?  This would mean her Personal Allowance is only £11,310, not £12,570.

Has she considered just taking a TFLS linked to the taxable element i.e. £16,760 in total, £4,190 TFLS and £12,570 taxable, or does she need the larger amount now?

Hi thanks for your reply.

She hasn't applied for marriage tax allowance as they are not eligible due to my dad being in the 40% tax bracket.

No she hasn't considered a TFLS linked to the tax element we didnt know this was possible ? She was under the understanding that any lump sum she would take out first would be be classed as the 25% tax free lump sum which is the reason why she's looking at taking and additional £12570 on top of the 25% TFLS to save on paying income tax next year on it.

They will need the larger amount after april when my dad retires so makes sense to draw it before new tax year.

So basically if she was to draw £1000 out first then she'll get issued a tax code and then apply for the further £11570 it will reduce the complications of awaiting for the tax refunded yea? 

Would she need to draw the 25% tax free lump sum before she did this too ? 

Thanks you really appreciated

She can't take any taxable pension income without first taking a TFLS which at least crystallises the taxable amount she needs.

Ultimately there is no difference tax wise but a first payment of £12,570 (equivalent to ~£150k annual pension) will have a lot more tax deducted at source than taking a small first payment and then taking the rest once a cumulative tax code is issued.

Say she took £10,000 TFLS, that would leave £30,000 crystallised and she could take that as and when she wants (subject to provider pay dates, they may only pay on the same day each month).

If the £30,000 was invested and grew to say £33,000 then the whole £33,000 is taxable when taken out of the pension.

She could use UFPLS, this is where she only crystallises enough for each withdrawal that she wants, say £16,760.  The remaining pension fund can continue to be invested and is uncrystallised.

https://adviser.royallondon.com/technical-central/pensions/benefit-options/ufpls-explained/

molerat

She likely has the option of taking the 25% in one lump then taking taxable amounts or she could spread the whole pension taking 25% tax free / 75% taxable with each draw.  What is she intending doing with this tax free sum - is she taking it "just because she can" ?

DRS1

Just one thought.  People are telling you what is possible.  Your mother should check with her pension provider to see whether her particular pension allows for all the things that are possible - some older ones don't. 

If she wants to do it this tax year it would be a good idea to start the process soon in the new year.  Don't leave it until March.

Silvertabby

ritch-vtr said:

p00hsticks said:

ritch-vtr said:

She's currently 65 and will start receiving state pension from april 2026, she hasn't worked for the last few years and hasn't used up any of her £12570 personal tax free income allowance in this tax year.

Has she checked her State Pension forecast to see that she's entitled to the maximum ? 
Check your State Pension forecast - GOV.UK
If not she may be able to boost it by buying additional years, but it would be best for her to do this quickly before she applies for her State Pension to avoid any delay.  

Yes we've checked it thanks and all her years is up to date for the maximum 

Thank you

You need to check the actual amount, not just the years she has paid NI.

The oft mis-quoted 35 years only applies to those who started work after April 2016.  The rest of us are under transitional arrangements, each with our own individual calculation.   For example, I needed 48 years of NI contributions (44 from working, 4 from paying voluntary Class 3s) in order to qualify for the full new State pension.  

Not complaining - far from it!  I, and many like me, are the winners under the new pension rules.

Albermarle

DRS1 said:

Just one thought.  People are telling you what is possible.  Your mother should check with her pension provider to see whether her particular pension allows for all the things that are possible - some older ones don't. 

If she wants to do it this tax year it would be a good idea to start the process soon in the new year.  Don't leave it until March.

As above,
I have one pension that allows you to take the 25% tax free in stages, but does not allow you to take any taxable income until all the tax free lump sum is taken ( I will actually transfer out of this pension at some point so I am not bothered by the restriction) .

OP - If the pension provider has a good website, you should be able to see what options there are for withdrawal.
However if it is old, it maybe not have a good website, or quite possibly is now run by a different company than originally.
If you tell us who the provider is ( and maybe was) you might get some useful feedback.