Can One Withdraw Tax-Free Pension Lump Sum in Multiple Installments?; STEVE WEBB Responds
Heading: Retiring Soon? Here's All You Need to Know About Lump-Sum Pension Withdrawals
Hey there! Are you wondering about taking a chunk of your hard-earned private pension? Well, you've come to the right place!
You've been working hard, and at 55, you've got the option to take 25% of your pension pot tax-free. But what about the remaining sum? Can you pull out 10%, say, now and the rest later? Let's break it down!
First off, remember that you've got the advantage of tax breaks when you invest into a pension. In return, HMRC has a say in how you draw out your money. And also, there might be specific rules for your individual pension scheme.
With modern-day defined contribution pensions, the principle is simple – you can take up to 25% free of income tax. The rest is subject to income tax when you withdraw it. However, since the introduction of 'pension freedoms' in 2015, you have two options when it comes to accessing your pension:
- Take up to 25% as a tax-free lump sum immediately and leave the rest in a flexible drawdown account.
- Transfer your entire pension pot into a different type of drawdown, known as UFPLS, where every withdrawal is one quarter tax-free and three quarters taxable.
In both cases, a taxable withdrawal lowers your annual allowance for further pension contributions to £10,000 per year. So, if you're considering the first option and aren't in dire need of the whole sum, here's a smart move: Take the full 25% and invest the part you don't need now in something like a stocks and shares ISA. This allows tax-free growth on the balance of the withdrawn amount.
Now, if you're eyeing a traditional salary-related or defined benefit pension arrangement, the tax-free lump sum is also up for grabs. However, the calculation can differ depending on the scheme. Some schemes offer a fixed lump sum and don't allow you to adjust it. But others give you the liberty to choose the combination of tax-free lump sum and regular scheme pension, as long as the total tax-free amount does not exceed 25% of the total pension value.
When it comes to taking a lump sum, always pay close attention to the scheme rules and consult the scheme directly if you have questions about your options. Keep in mind that some DB schemes may require you to forgo a significant portion of your pension in exchange for a lump sum, so be sure to weigh the advantages carefully.
Lastly, remember that the normal minimum pension age will rise to 57 overnight on 6 April 2028. Get the details on the transition from 55 to 57 here.
Still got burning questions about your pension? Ask Steve Webb here, and he'll do his best to provide insightful answers to your concerns.
### Footnotes:
- [1] Pension Wise, Pension Wise Scams: How to Spot and Avoid Pension Scams
- [2] Pension Advisory Service (TPAS), Understanding Lump Sum Cash Payments from Personal Pensions
- [3] Bank of Switzerland (Swiss Re), Swiss Retirement Plans: An Overview
- Taking a lump sum from your pension might offer you a chance to access a significant portion of your savings, but it's essential to understand the tax implications and pension rules.
- Personal-finance advice could prove invaluable when deciding whether to invest your pension lump sum into stocks, savings, or other financial instruments.
- Upon reaching 55, you can take 25% of your pension pot tax-free, but before considering a withdrawal, you should weigh the advantages and potential drawbacks of taking a lump sum versus a regular pension.
- Financial experts often recommend investing the remaining portion of the pension lump sum that isn't required immediately, such as in a stocks and shares ISA, for tax-free growth.
- If you're considering a traditional salary-related or defined benefit pension arrangement, the tax-free lump sum is still an option, though calculations can vary based on the scheme.
- As the normal minimum pension age rises from 55 to 57 on 6 April 2028, keep yourself informed of the transition to ensure you meet the qualifying age for pension withdrawals.
