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Darcydog · 18th May 2017, 06:19

I would recommend caution in taking the full "tax free lump sum" ( note - they changed this to 'pension commencement lump sum' (PCLS) a while back - so we can assume that it may not always be tax free

) - and can I confirm that currently all of the PCLS is tax free. The post above that says that in some circumstances anything over £30k can be taxable confuses the tax treatment of Redundancy Payments with the PCLS.

The reason why I say be cautious is because if you leave the fund intact within the pension it is growing virtually tax free and should you die then if you have been sensible and set up a Trust to accept the death claim value on behalf of your spouse and children then the entire pension value falls outside of your estate for IHT purposes.

Contrast that to taking the PCLS out of the pension. Once you have done that you have removed this sum from the pension where it is in one of the most tax efficient environments possible - and! - should you die prematurely then the entire pension fund can easily and simply be outside of your estate for IHT purposes whereas the PCLS, once removed from the pension is usually placed in a taxable environment both for Income Tax and Inheritance Tax.

PHASED RETIREMENT

And don't forget you can always access this PCLS as slices of tax free "income".

Money purchase pension is written in segments - usually as 100 sub policies. So if you have £100,000 in a pension then you could have 100 policies of £1000.

So rather than taking £25,000 a a tax free PCLS leaving £75,000 in Drawdown, say, - you could access twenty segments from the pension to move £20,000 out of the main pension so you have £80,000 still in the main scheme and £20,000 placed into a Drawdown scheme running alongside.

From this Drawdown scheme of £20,000 you can take the 25% tax free PCLS and use this £5000 as "income" - plus, depending on your other income and your personal tax allowance, you can then take a portion of the £15,000 in the Drawdown plan as true Income which will be subject to income tax - but if you keep this income (plus any other earned income) below your personal tax allowance then this income will be tax free as well.

This is known a Phasing Pension Benefits or Staggered Vesting. It is highly tax efficient because rather than accessing ALL your Tax Free PCLS and then having to figure out where to put it - you slice it over many years to give you tax free "income".

It does depend on you personal circumstances tho' - if you have debts then using your Tax Free PCLS to clear those debts is undoubtedly a strategy that MUST be considered.

18th May 2017, 06:19	#19
Darcydog This is my second home Join Date: Jul 2014 Posts: 5,428 Thanks: 3,123 Thanked 3,170 Times in 2,096 Posts	I would recommend caution in taking the full "tax free lump sum" ( note - they changed this to 'pension commencement lump sum' (PCLS) a while back - so we can assume that it may not always be tax free ) - and can I confirm that currently all of the PCLS is tax free. The post above that says that in some circumstances anything over £30k can be taxable confuses the tax treatment of Redundancy Payments with the PCLS. The reason why I say be cautious is because if you leave the fund intact within the pension it is growing virtually tax free and should you die then if you have been sensible and set up a Trust to accept the death claim value on behalf of your spouse and children then the entire pension value falls outside of your estate for IHT purposes. Contrast that to taking the PCLS out of the pension. Once you have done that you have removed this sum from the pension where it is in one of the most tax efficient environments possible - and! - should you die prematurely then the entire pension fund can easily and simply be outside of your estate for IHT purposes whereas the PCLS, once removed from the pension is usually placed in a taxable environment both for Income Tax and Inheritance Tax. PHASED RETIREMENT And don't forget you can always access this PCLS as slices of tax free "income". Money purchase pension is written in segments - usually as 100 sub policies. So if you have £100,000 in a pension then you could have 100 policies of £1000. So rather than taking £25,000 a a tax free PCLS leaving £75,000 in Drawdown, say, - you could access twenty segments from the pension to move £20,000 out of the main pension so you have £80,000 still in the main scheme and £20,000 placed into a Drawdown scheme running alongside. From this Drawdown scheme of £20,000 you can take the 25% tax free PCLS and use this £5000 as "income" - plus, depending on your other income and your personal tax allowance, you can then take a portion of the £15,000 in the Drawdown plan as true Income which will be subject to income tax - but if you keep this income (plus any other earned income) below your personal tax allowance then this income will be tax free as well. This is known a Phasing Pension Benefits or Staggered Vesting. It is highly tax efficient because rather than accessing ALL your Tax Free PCLS and then having to figure out where to put it - you slice it over many years to give you tax free "income". It does depend on you personal circumstances tho' - if you have debts then using your Tax Free PCLS to clear those debts is undoubtedly a strategy that MUST be considered. Last edited by Darcydog; 18th May 2017 at 06:31..