Withdrawing pension lump sum at 55

[PurpleCarpets]

Hi all,

I have a bit put away in a defined-contribution pension. Looking ahead a little, it would make sense for various reasons for me to take the 25% tax-free lump sum at 55. But I wouldn't want to stop working then and I'd still be saving from my salary. If I could carry on putting money into the pension, and getting (higher-rate) tax relief then I'd like to do so. But can you do this after having taken out your lump-sum entitlement?

You will want to avoid triggering the MPAA - Money Purchase Annual Allowance.

www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa

So you want to make sure no more than the 25% lump sum js taken and that the rest in drawdown does not get accessed.

@nannynick is straight in with the excellent point on the MPAA. As you mentioned being a higher rate tax payer, that’s definitely a consideration, you could easily be wanting to make high contributions to maximise tax relief.

Other things to consider - how old are you? In 2028, you’ll need to be 57 to access your pension, not 55 - so is it even possible for you? Still leaves the same question, but the details of you situation might be different.

Another watch out is that looking purely at the pension (not what you’re proposing to do with the money) you’re likely to lose out £ if you take 25% at 55/57. You either take your 25% tax free in one go, or you take 25% tax free of every withdrawal. If a pension pot is growing (which you hope it will be!) you’re better off with 25% tax free from every draw down.

Also, I’m not sure how common this is, but if you withdraw then continue to make payments, you might get flagged for recycling - tax avoidance! I would guess (and it really is a guess!) that if you can show that you clearly still have an income and the ongoing contributions are coming from that, you’d be fine. But it’s definitely something I’d be aware of and check with an IFA or HMRC!

My DH took half of his 25% tax free amount as soon as he was 55 and then worked for a further 6 months and then retired.

Thanks all, I think I might need to take advice, but this has been really useful in pointing me towards the issues to consider.

Simple answer: yes.

Recycling usually impacts those with no record of input
ONLY take the 25% and not the income element to avoid triggering MPAA

Wonder if anyone would be able to advise me. Sorry if these questions are basic.

Dh had his pension meeting yesterday from work, and a lump sum, tax free of about £70k is now available to him. I've read pros and cons. I'm trying to to work out whether he really should take it. He's still working, no plans to retire yet. We only have a few years left on our mortgage, and we took out a good deal which runs till it finishes.

Other than taking said money and partially wasting it on a new caravan, world cruise, (teasing), then investing some, we could start making payments, up to our overpayment limit, off the mortgage - which may not be the best thing , because we are on a hood deal.

I'm wondering how we make such a decision. Do I need a good spreadsheet to start with, to try and calculate what his pension annual income will be if he does or doesn't take the lump sum, before We consider anything else?

@Oblomov22 is it a defined benefit pension, or defined contribution? If defined Beverly then check what the “commutation factor” is - they are often not very generous, which would mean your DH gives up more income to receive the lump sum, and the scheme receives a benefit from the deal.

If you have no plans to retire then the sensible thing would be to leave it - it doesn’t sound like you need it (eg to clear your mortgage), and if you spend it now you won’t have it when you do retire - what will your income be like in retirement if he takes it, compared to waiting? What sort of lifestyle would that provide?

Thank you Slippery. I don't know. I will find out.

If it's defined contribution I would leave it.

The value of mine has dropped this year and so taking it now when you don't need it will potentially lose you money vs taking it when things pick up again.