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Cash lump sums
It has always been possible to take 25% of your pension pot as a tax-free lump sum but now everybody can take the remaining 75% of their pension pot as a cash sum, but it will be taxed at your marginal rate.
There are two ways in which you can take cash from your pension:
- By asking your pension provider to pay your entire pension pot as a cash lump sum
- By asking your pension provider to pay part of your pension pot as a cash sum - Uncrystallised Funds Pension lump Sum (UFPLS)
The most important thing to understand about cash sums taken over your tax-free amount is that they will be taxed as income at your marginal rate. Therefore, if you take a large cash sum you could end up paying higher rate tax. Remember that your provider will deduct tax at source, which means that you will only receive the after-tax amount.
Money Purchase Annual Allowance (MPAA)
This can be complex, but if you take more than 25% of your pension pot (e.g UFPLS) or take income from a flexi-access drawdown plan, and you are still paying into a money purchase pension, the MPAA will apply.
You will be subject to a tax charge if your total money purchase pension contributions exceeds £4,000 per tax year.
If you want to make the most of pension freedoms you should start planning ahead and make sure your financial affairs are in good shape in the years running up to retirement.William Burrows
Call: 07730 435 657
Leeds Innovation Centre
103 Clarendon Road
LEEDS, LS2 9DF