Is the pension 25 per cent tax-free withdrawal allowance a fixed and once-only option?
For example, if my pension fund is £100,000 and I withdraw 25 per cent – £25,000 – then £75,000 remains.
If the fund, over time, then rises in value to, say, £120,000, can I take a further £5,000 tax-free to top up and maintain the 25 per cent tax-free allowance? Thanks for clarification.
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One option is to go for something called ‘flexi-access drawdown’. Under this arrangement you take your full tax free cash at the start.
The balance then goes into a drawdown account and all withdrawals are subject to income tax.
Even if the pot grows, you don’t qualify for any extra tax-free cash – all subsequent withdrawals are taxed.
So, in your example, if you move £100,000 out of a pension and take £25,000 in tax-free cash, the remaining £75,000 would go into a flexi-access drawdown account.
Even if that £75,000 grows over time, all the money you take out will be taxed, and you will only ever have got £25,000 in tax-free cash.
The alternative approach is to open a different sort of drawdown account.
The government’s ‘PensionWise’ website refers to this approach as ‘taking your cash in chunks’ but you will sometimes see this described by the horrible phrase ‘Uncrystallised Funds Pension Lump Sum’ – but don’t be put off by the title!
The basic idea here is that you would move your whole £100,000 across from your pension fund to your drawdown account.
Every withdrawal would then be 25 per cent tax free and 75 per cent taxable.
If the money in the fund grew over time, then you would get more tax-free cash overall than if you went for the first option and took all your tax-free cash out up front.
The PensionWise website covers these two options as well as other things you can do with a pension pot on this helpful page.
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