Why can’t I take a 25% tax-free lump sum out of my pension?

admin
12 January 2016

Q

My provider has told me that in order to take the tax-free cash, I would have to place my pension pot into Flexi- Access Drawdown and to do that I have to have more than £50,000 invested. Is that true? If so, are there any other options so that I can take my tax-free sum? 

From
RR/Ryde

A

New pension freedoms, which were launched last April, gave many people far more choice in how they can take their pension benefits.

However, different pension providers have different rules in terms of what they will allow. For example, your provider seems to insist on a minimum investment fund of £50,000 to go into flexi-access drawdown, whereas others will have lower minimums.

Most personal pensions will let you take 25% of your fund as a tax- free lump sum – called a Pension Commencement Lump Sum – if you are aged 55 or older.This is paid out when you take your pension benefits, which for a personal pension means either going into drawdown or buying an annuity.

However, since last April it has also been possible to access some of your pension without designating funds to a drawdown plan or buying an annuity.This is known as an Uncrystallised Funds Pension Lump Sum (UFPLS).

This might not be appropriate for you and won’t provide you with a tax-free lump sum, although usually 25% of the amount you take will be tax free with the rest being taxed as your income under PAYE. With UFPLS, you still have the ability to take a tax-free pension commencement lump sum in the future when you take pension benefits.

While the new pension rules were welcomed, they do provide added complexity and more scope for people to make the wrong decisions.This is why many people accessing their pensions need to take independent financial advice.

The options open to you are likely to include finding out if UFPLS is appropriate and then if your provider will allow it, although you’ll be taxed on most of the lump sum you receive, transferring to a more flexible pension plan, although you’ll need to be careful of charges and losing any benefits, or finding the money you need from elsewhere.

Patrck Connolly is a certified financial planner for Chase de Vere.