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Annuities Pension Drawdown Fixed Term Plans

Cash lump sum

Since 2015 it has been possible to convert all of your pension pot into a cash lump sum. 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)

Uncrystallised Funds Pension Lump Sum (UFPLS)

UFPLS is a payment option which allows your insurance company to pay you a chunk of your pension pot as a cash sum when you reach retirement age (normally any time after age 55). It is taxed in the normal way; 25% tax free and 75% taxed at your marginal rate.

You can take a series of UFPLS payments spread over several tax years in order to reduce your tax bill.

Money Purchase Annual Allowance (MPAA)

Taking a UFPLS will trigger the 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.

See below for more on Money Purchase Annual Allowance

Top Tip - 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.

Tax on Lump Sums

If you are taking a lump sum or income from your pension pot watch out you don't end up paying more tax than you have to

If you are not careful you may end up paying too much tax.

Money purchase annual allowance

Normally you can get tax relief on pension contributions up to £40,000 a year or 100% of your taxable salary.

But if you take cash or income from your pension in the following ways you will be only be allowed to pay £ 4,000 per annum into your money purchase pension plans before you get hit by an extra tax charge.

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