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Should I take my pension lump sum and when do I pay tax?

10 March 2021

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Question by Richard

My pension is near the LTA and conveniently, I am near retirement.

First question is, should I take the PCLS and crystallise?

Second question, assuming I exceed the LTA, when do I pay the tax?

That is, if there is any excess above the LTA, do I only pay when I withdraw income (25%) or take the lump-sum (55%) or something else?

Would it be best to take the PCLS and then let the balance remain invested for as long as I can thus avoiding paying the tax, I guess until 75 when there is another assessment?

Thank you.


Answered by Carly Dunningham

Hi Richard, it sounds like you’ve already done a lot of homework in terms of the LTA rules, when your pension is assessed against the LTA and possible tax charge amounts. So, that’s a good start. With regard to your first question, it might be best for you to take advice on this to determine whether it’s the right time to crystallise your pension, taking into account your wider circumstances.

If it does look like you’re going to exceed the LTA, you could just crystallise the pension up to the level of the LTA and take PCLS on that basis, leaving the excess above LTA invested and thereby not paying any tax right now. However, it’s worth seeing a Financial Planner to advise you on this before making any decisions. Also, there are some ways of drawing a little more without breaching the LTA, such as the ‘small pots’ rule where you can draw up to three small lump sums that are not assessed against the LTA. Again, this can be considered alongside your wider circumstances and options if you seek advice. And you are correct in your statement regarding the tax levels, it is 25% on any excess taken as income, or 55% on lump sums, with a further LTA test at age 75.

I hope this helps with your decision making.

Kind regards

Carly

Answered by

Carly Dunningham

Chartered Financial Planner & Director

Originally from Derbyshire, I came to Liverpool in 1998 where I graduated from Liverpool John Moores University alongside my now husband and we have never left the city. I got straight into Financial Planning after leaving university and I love working closely with clients to really understand their life goals and what’s important to them. When I’m not creating financial plans for clients, I’ll be spending time with my 6-year old daughter, walking the dog or doing yoga!