Lump sum withdrawals
Taking lump sums and your 25% tax-free cash
You can take up to 25% of your pension fund without paying any tax. Many people use their tax-free cash to settle their mortgage, place a deposit on a house for their children, or simply enjoy a well-earned holiday after years of working. As long as your provider allows it, you have the freedom to take as many lump sum withdrawals as you like with anything in excess of your 25% tax-free amount being taxed as normal income.
More freedom when taking your tax-free cash
When you retire you are entitled to a pension commencement lump sum – a tax-free withdrawal of up to 25% of your total pension fund. You are now able to split up your tax-free cash into as many lump sums as you like, instead of having only one opportunity to make a tax-free withdrawal as was the case in 2014/15. By splitting up your lump sum withdrawals over several years, you could keep more of your money invested and your pension could potentially continue to grow in value. Conversely, if your investments perform badly you could have less money available in later life.
More information on staying invested at retirement
Unlimited lump sum withdrawals
Under the new pension rules it is now possible to make unlimited lump sum withdrawals in excess of your 25% tax-free amount, for example to pay off a remaining mortgage. However, this will be subject to tax at your marginal rate. In the words of ex-pensions minister Steve Webb, this means you could technically withdraw your entire pension fund to buy a Lamborghini!
“According to ex-pensions minister Steve Webb, you could technically withdraw your entire pension fund to buy a Lamborghini!”
Although this is possible, it is not generally advisable as your pension is designed to provide an income for the rest of your life. Plus, any withdrawals in excess of your 25% amount will be taxed as income at your marginal rate.
What else has changed under the new pension rules?
How much can I afford to take from my pension?
Your pension needs to provide an income for the rest of your life, so too many early withdrawals means you could run out of money later. If you are considering taking a lump sum, especially in excess of your 25% amount, you should consider taking financial advice first.
A financial planner can forecast how long your pension will last and how much you can afford to take, while forecasting the effects of inflation and a market downturn. You can book a free consultation with one of our nationwide financial planners to find out more.
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The decision to access your pension is an important one and will affect your income and possibly your standard of living for years to come. Therefore we recommend that before any decision is made you receive regulated financial advice or get free guidance from Pension Wise. Find out more about Pension Wise.