Can I withdraw a cash lump sum from my pension?
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I am planning to retire next year when I am 65, although I won’t get my state pension until I am 66. I have about £310,000 in my pension fund, which I’ve been contributing to for more than 25 years. I understand that I am entitled to take a quarter of my pension fund as a cash sum. I want to do this to pay off my mortgage, and I also want to help my grandchildren with their deposits as both are looking to now buy a house. Is this possible?
Jeremy Woodruff of Smith & Pinching responds:
The tax treatment of your withdrawals from your pension will depend on what type of arrangement you have in place, so it is important to plan carefully before you retire so that you benefit as much as possible from any exemptions.
A pension commencement lump sum (PCLS) can be taken from your personal pension fund – as you rightly say, it can be up to 25pc of your fund and is paid to you free of tax. You don’t have to take any of your entitlement to a PCLS if you don’t want to, but it can play an important part in planning for you if you have a purpose for those funds, like repaying a mortgage.
If you do decide to take all your PCLS, you would then have the opportunity to take an income in the form of an annuity (a plan that provides an income for life) or a pension drawdown arrangement (a contract with a pension provider whereby you draw directly from your fund, leaving the remainder invested). However, as you would have taken all your PCLS, all your subsequent income or withdrawals will then be treated as income for tax purposes.
You can also leave your pension savings in their original pension structure and take direct withdrawals from that – this is known as taking uncrystallised funds pension lump sums. In that instance, you are not entitled to a PCLS but would pay no tax on 25pc of each withdrawal. However, the remaining 75pc of each withdrawal would be taxed as income, potentially pushing you into a higher tax bracket if the sum you take is substantial.
This is a complex area and to try and explain fully in my short response is just not possible. Therefore I strongly recommend that you get independent advice from a Chartered Financial Planner to ensure that you access your pension savings in a way that both meets your needs and is done in a tax-efficient manner.
Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information, please visit www.smith-pinching.co.uk
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