How to access your pension by a number of lump sums ?

So how does somebody access a UK pension by a number of lump sums ?

Under current rules, it is up to you how and when you can access a UK pension from the age of 55. Although this will be increased to age 57 from 6th April 2028.

You can leave it invested or you could access by taking a number of lump sums until your pension pot is empty and runs out. This is commonly known as Uncrystallised Funds Pension Lump Sum (UFPLS).

So how does taking your pension as a number of lump sums work ?

The idea is that you money out as and you wish until it runs out. So think of it as a piece of cake or large pie and you slice it in chunks until it has all gone.

Ideally it is up to you how much you take and how often you access.

On each withdrawal you take 25% is tax-free and 75% is then taxable. This will be added to any other income you receive within the tax year.

This will automatically be done by your provider at source, their is no need to compete self-assessments. The provider will also notify HMRC on your behalf.

The remaining funds will stay invested. It will go up and down in future and the future value isn’t guaranteed, it’s subject to investment performance.

By doing this, there is the potential for investment growth, or the risk for investment loss.

Any future growth will remain tax-free within the pension wrapper in a very tax-efficient manner.

The key advantage of accessing this ways is that you can control how long the pot lasts for, so it may be 5, 10 or 15 years and you could control it in a more tax-efficient way to stay within a certain tax banding.

How you access the pot will depend on limits or restrictions for each withdrawal or the frequency each year.

So a provider may say a minimum of £ 1,000 each time or limit you to 3 lumps each tax year. There may also be a fee or charge each time you withdraw money.

Be aware that not all providers may not offer this pension product so you may have to shop around. So check with your current provider and do they charge any fees or exit charges to complete stated transfer.

Getting a plan in place to access ?

• Let’s say you have a pension of pot of £ 100,000 and wish to access via method. You could say that the pot is going to last you 10 years.
• You could say to your provider that I am going to take £ 1,000 per month as a regular income until the pots runs out.
• Or you may say that you are going to take £ 10,000 as a one off lump sum. Possibly at the start or end of each tax year.
• It may be that you take more money in the early years while you are fit and healthy and want to enjoy travelling, or wish to spend on leisure and health pursuits whilst actively mobile. As you get older you may not need so much income, your circumstances could change.
• You need to plan how long the pot will last for ?
• You could take too much out in the early years.
• You may live longer than you originally planned for.
• The return on investments don’t perform as well as you expected.
• On pension provider’s website it should have tools and calculators to help you, as illustrations, so take advantage of them as part of your future planning.

Finally are you happy making your own investments decisions or do you need an IFA to help you investing such funds.

How to shop around ?

• Check that your provider offers this option and are you happy with them.
• What are the new fees and charges to manage the pot.
• What are the restrictions of access and is there a fee every time you make a withdrawal.
• Fees and restrictions will vary between providers.
• It is important to shop around ahead of accessing to find a product suitable to your needs and wishes.

You can use an IFA if you wish but what fees do they then charge you.

How to find an Independent Financial Adviser.

https://www.moneyhelper.org.uk/en/getting-help-and-advice/financial-advisers/choosing-a-financial-adviser

What about the tax implications ?

The rules may appear complex but once explained they can appear relatively simple.

On each withdrawal 25% is tax-free and 75% is then taxable. So if you take £ 1,000 then £ 250 is tax-free and £ 750 will be then be taxable and added to other earnings.

At present the following UK tax bands apply (as of 2024/2025):

• Tax free personal allowance: £ 0 to £ 12,570
• Basic rate: £ 12,570 to £ 50,270 (20%)
• Higher rate: £ 50,271 to @ 125,140 (40%)
• Additional higher rate: £ 124,140+ (45%)

It may be beneficial for tax purposes to spread the withdrawals over numerous years, so you may stay in a lower tax bracket.

For example, your pot is £ 40,000 and you access £ 4,000 per year. Then. £ 1,000 is tax-free and £ 3,000 is taxable on each withdrawal, This would then to added to any salary or income you receive during that respective tax year.

Your pension provider will deduct emergency tax from your 1st payment directly at source. Which means you may pay more than expected so receive an initial lower sum. They can reclaim on your behalf or you can reclaim via gov.uk via competing following forms.

• P50Z – If you have taken flexible payment that uses up their pension pot and has no other income.
• P53Z – If you have taken flexible payment that uses up the pension pot and have other taxable income for that tax year.
• P55 –  If you have taken flexible income that hasn’t used up all the fund. Have only taken 1 payment and don’t intend taking any further payments from the same pension this tax year and provider is unable to reclaim on your behalf.

Further guidance can be found at:http://www.gov.uk/claim-tax-refund

Can I still pay into my pension ?

As soon as you take a payment as  lump sum from the pot, you will trigger the MPAA, (Money Purchase Annual Allowance)

You can make contributions into a DC pension but you are limited to contributions of £ 10,000 per annum for tax-relief. (As per 2024/2025)

If triggered a pension provider will normally give you a statement or certificate by that pension provider.  You are then normally required to give it to any current schemes you are contributing within 91 days. Or you may incur a small tax charge.

Any so called tax charge will be calculated by adding the amount you exceeded the MPAA by to your annual income for that tax year.

This charge should be declared and paid through your income tax self-assessment forms.

What happens to your pot if you die ?

• If you did before age 75
• Any funds left in the pot can pass to a nominated beneficiary. As long as they make a decision and is paid within 2 years it can be remain tax-free. If the 2 year rule is missed it will be added to beneficiaries other income during the tax year and taxed in the normal manner.
• If you die over the age of 75
• Any money left in the pot can be passed on to beneficiaries as income or lump sum, but it will be classed as income as added to other sources. Again taxed in the normal manner.

What about inheritance tax ?

The funds drawn from the pension pot and not spent will be added to other assets within an estate and will count as part of IHT.

At present any money within a pension wrapper does not form part of your estate for IHT. Only becomes applicable once it leaves the pension fund.

If you found the above information useful, or wish to look at other blog posts about pensions, check them out on www.moneyminted.co.uk