If I take a flexible lump sum, how am I taxed?

With this option you spread your tax-free cash across all withdrawals you take from your pension savings. Usually, 25% of each withdrawal will be tax-free and the remaining 75% will be taxable.

Note that you get a personal allowance (the standard is £12,570 in the current tax year) of tax-free income each year. Taking large cash sums could move you into a higher tax band and give you a large tax bill – especially if you have other income on top.

The flexible lump sum you receive from us is likely to be quite a lot lower than the amount you take out of your pension savings. This is because:

  • only 25% of each flexible lump sum is tax free – you pay tax on the rest.
  • if HM Revenue & Customs (HMRC) hasn’t supplied us with your tax code for the current tax year, your flexible lump sum will be taxed using a temporary (emergency) rate. In most cases this will mean that too much tax will be deducted and you’ll have to reclaim the overpayment from HMRC.

– Say you take £30,000 as a flexible lump sum but you’re on an emergency rate of tax

– £22,500 is taxable, meaning you pay £8,399.61 in tax.

– So you’d get £21,600.39.

The example uses UK rates and allowances for the current tax year.

Pension Wise can give you guidance on your options.

Was this article helpful?

Please score it so we can improve and offer you more

LikeDislike
Loading...
 Members 116 people found this helpful