‘I’m 72, and have taken a £20k pension lump sum – can I withdraw more tax-free cash?’
Pensions Doctor
Write to Pensions Doctor with your pension problem: [email protected]. Columns are published weekly. Becky O’Connor is away.
Dear Charlene,
I am 72 years old and I have a private pension fund now worth £125,000.
I retired in 2017 and took a tax-free lump sum at that time (around £20,000) and have not touched the fund since.
What further tax-free sums can I now withdraw?
How does the 25pc rule apply to, say, an annual lump sum withdrawal? Is it tax-free up to 25pc of that year and subsequent year’s fund value, or do previous withdrawals enter the 25pc calculation?
Thanks for being there,
Andrew
Dear Andrew,
When you access a private pension such as a Sipp (self-invested personal pension), you don’t have to take the whole pot in one go. Up to 25pc of what you do choose to take can usually be paid tax-free.
When you withdrew £20,000 as tax-free cash back in 2017, you would’ve had to choose what to do with the other £60,000 of your pot (if 25pc is £20,000, then you would’ve accessed a total of £80,000).
You’ve said you haven’t touched the pot since, so it’s likely that it stayed invested in your existing pension, but was moved into drawdown, ready to pay you a taxable income.
Based on what you’ve told me, it sounds like you didn’t access your whole pot at the time.
The current value of what you haven’t already withdrawn or moved into drawdown would be monitored by your provider as “uncrystallised funds”. I prefer to call them “unused funds”.
You should ask your pension provider to confirm the split of your current £125,000 pot value, between what represents funds in drawdown and what are unused.
If they say you’ve got no unused funds, then I’m afraid there’s no more tax-free cash available from this pot.
But if you do have unused funds left, this could mean more tax-free cash.
You’ve asked about lump sum withdrawals. This is one way you could access any unused funds.
Let’s assume your provider says you have £40,000 worth of unused funds remaining today. I’ve just used this as an example, so it isn’t guaranteed or a reflection on your own pot.
You could take this £40,000 as a one-off lump sum withdrawal – £10,000 would be tax-free and £30,000 would be subject to income tax, deducted by your provider.
Or you can choose to take a series of smaller lump sum amounts with 25pc tax-free based on the value of each lump sum withdrawal at the time.
Taking a series of lump sums this way allows you to spread any tax-free cash you have left over several payments. The lump sums could continue until you have no unused funds remaining.
Back to our example.
A cash lump sum withdrawal of £4,000 now would give you £1,000 tax-free with the rest (£3,000) subject to income tax.
You’d have £36,000 unused funds immediately after the first withdrawal, which could stay invested and potentially benefit from investment growth.
I want to highlight two important points about lump sum withdrawals:
- Due to the way pension providers must apply income tax and tax codes to pension withdrawals, you might be overtaxed the first time you take one of these lump sums. You can reclaim overpaid tax from HM Revenue & Customs using form P55, to avoid having to wait until the end of the tax year.
- Taking a lump sum withdrawal will reduce the amount you can pay into private pensions in the future, as you’ll be deemed to have flexibly accessed your pension.
Before you flexibly access, you can contribute up to £60,000 annually. But after you flexibly access, the amount you can pay into private pensions like Sipps drops to £10,000 a year.
Taking tax-free cash and no drawdown income is not treated as flexible access.
Full financial advice can recommend the best course of action to meet your goals and consider your personal circumstances
For more general information on the options available, the free government-backed service Pension Wise can be a good start.
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