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

There are 2 ways of taking your pension pot as a flexible lump sum. With both, you’ll get 25% of your pension pot tax free, and you’ll pay tax on the remaining 75% of it. Option 1 lets you take your tax-free cash up front and option 2, lets you take your tax-free cash gradually.

Note that you get a personal allowance (the standard is £12,570 in 2021/2022 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 2021/22 tax year.

Pension Wise can give you guidance on your options.

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