You can withdraw up to 25% of your pension fund as tax-free cash when you turn 55 (it will increase to 57 in 2028). This is referred to as a pension commencement lump sum (PCLS).
Ahead of the November Budget, state pensioners have been cautioned against taking money out due to “rumours” from the Labour Party.
You can withdraw up to 25% of your pension fund as tax-free cash when you turn 55 (it will increase to 57 in 2028). This is referred to as a pension commencement lump sum (PCLS).
The remaining amount can be moved into drawdown, from which you can withdraw taxable income as much or as little as you like. Alternatively, you can use the remaining funds to purchase an annuity, which will also be subject to income tax and provide a lifetime income guarantee.
Taking the entire remaining 75% as cash is your last resort, but income tax will still apply. Some persons can be forced into a higher tax band if they take such a big sum all at once.
“With the Budget quickly approaching, the rumor mill is going into overdrive regarding whether there will be changes to pensions tax incentives from November,” cautioned Rachel Vahey, head of public policy at AJ Bell.
“Those who have amassed larger pension funds must feel a little like they are in the dark. However, people shouldn’t be attempting to question a chancellor’s budget address while they are making crucial decisions on their future retirement wealth.
A significant long-term choice is whether and when to withdraw tax-free funds from your pension. For people who still want to use balance because they need the money for retirement or for other purposes, including paying off debt, it’s crucial to consider it a final decision and be aware of all the ramifications, including the fact that it cannot be reversed.
The wisest course of action is typically to leave money in your pension until you need it. You should be able to take out a larger tax-free lump payment because it can grow tax-free. Your maximum tax-free cash will be £100,000 if your pension is currently worth £400,000. You would receive an additional £25,000 tax-free if you waited until it reached half a million, which could happen in a few years with a respectable rate of contribution and robust market growth.
“You’ll probably start to pay taxes after the money leaves your pension. For instance, if the amount exceeds your personal savings allowance and is in a savings account, you might be required to pay taxes on the interest. A pension tax-free lump amount will probably require multiple contributions to drip-feed into a tax shelter like an ISA, so if the money is invested outside of your pension, you might end up with a capital gains and dividend tax bill.