When thinking of taking money out of your pension you do not need to take your pension tax free cash lump sum out in one go.

The first time you take money out of your pension you will usually have the option to take a proportion as a tax free cash lump sum. The amount available will be around 25% of your pension value. This is known as the Pension Commencement Lump Sum (PCLS).

Rather than taking your pension tax free cash in one go, you can actually withdraw it as a series of payments over a number of months or years.

There are very good reasons why you might want to do this.


Only certain pensions allow pension tax free cash to be withdrawn in phases


Defined benefit pensions, also known as final salary pensions, will not normally allow you to take your pension tax free cash as a series of payments.

Instead you will need to make a decision at the point you decide to start your defined benefit pension whether you want a higher pension tax free cash lump sum or a higher income. This will be a one-off decision and is then final.

For defined contribution pensions, also known as money purchase pensions, you will have more options in how to take your tax free cash.

If taking your tax free cash as a series of payments rather than in one go appeals to you then you will need to make sure your pension provider offers flexible retirement benefits. These are mainly known as flexi-access drawdown or Uncrystallised Funds Pension lump Sum (UFPLS)


Examples of taking your pension tax free cash in phases


Let’s look at a few examples of where you may consider taking your pension tax free lump sum in phases.

John has decided to retire aged 60. His spouse plans to continue working for a few more years so he only requires a smaller income from his personal pension to top up the earnings from his spouse.

John’s personal pension is valued at £500,000. He could take £125,000 as a tax free cash lump sum but John doesn’t need to take this much. Instead he opts to withdraw £16,760 as a part taxable income (75%) and part tax free cash payment (25%). He plans to do this for the next seven years until his State Pension starts providing his pension can afford it.

The beauty of this strategy is that as John has no other income for the tax year he can use his Personal Allowance of £12,570 to draw out ‘taxable income’ (but not actually be taxed on it as it’s within his Personal Allowance) and £4,190 of his tax free cash allowance.

In another example….

Rachel, 55, has decided to wind down her work leading up to full retirement in 5 years’ time. She is now working part time so bringing in less income. So she decides to top up her income via withdrawals from her personal pension which is currently valued at £650,000.

She is already a basic rate Income Tax payer so any taxable withdrawals from her pension could be taxed at 20% or more.

Rachel knows that she is entitled to 25% of her pension fund as tax free cash (£162,500) but she doesn’t need all this money in one go.

So she opts instead to take £10,000 per year as a pension tax free cash lump sum.

This way she pays no Income Tax on her pension withdrawals whilst she withdraws this way.


Reasons why it’s not a good idea to take all your pension lump sum in one go


Whilst it may be tempting to take all your pension tax free cash in one go, if you don’t need the money this can be an inefficient use of the funds.

For a start, money inside your pension is usually invested and therefore over the long term should hopefully see significant growth. If you take the cash lump sum out and park the money in a bank account it’s probably not going to earn much interest over the long run. Your money might even fall in real terms after the impact of inflation.

Your pension tax free cash is a percentage of the overall pension value (usually 25%). The longer you delay taking this or the small the chunks you take out the more chance your pension has to grow over time. Meaning you could have access to a bigger tax free cash lump sum in the future.

By taking your pension tax free cash out in phases it allows you to be clever with your tax planning. Like the examples shown above you can choose to take some tax free cash and particular times in your life to suit your circumstances which can minimise your overall tax bill.

Finally, keeping as much money as you can invested inside a pension means it will usually be free of Inheritance Tax on your death. The more pension tax free cash you take out of your pension and don’t spend the more you are potentially increasing the Inheritance Tax bill for your beneficiaries.

If you are considering retiring and are not sure on what to do with your pensions then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the retirement you desire. We’ve created hundreds of happy retirements, this could be you too!


Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.