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Don’t pay 75% tax on your 25% pension lump sum

Following the introduction of the new pension rules, we have been very concerned to receive calls from a number of customers who have been confused by information given to them by their existing pension provider. Many have been wrongly led to believe that they have no option other than to pay tax on 75% of any lump sum they take from their pension.

Many customers have called their pension provider after the 6th April 2015 and asked to be paid ‘their’ 25% lump sum - clearly meaning the 25% tax free lump sum entitlement that exists within most pension contracts. It therefore came as a surprise when they were told that while they could take 25% of their pension fund as a lump sum, only the first 25% of the 25% they take will be tax free, but they would have to pay tax on the 75% of the 25% pension lump sum they took. No wonder the customer is confused !!!

To be clear, the customer isn’t really being given the answer to the question they are asking. The problem arises from the fact that the pension provider can only discuss what they and their particular product can offer and not what the pension rules allow the customer to do if they use an alternative product or provider. This means that while the answer given to the customer isn’t wrong, it isn’t the full answer.

The following explains the situation simply – we hope !!

The important thing to understand is that personal pensions and (flexi-access) drawdown are different products

All customers with a personal pension have an entitlement to take 25% of it as a tax free lump sum

The change to the pension rules allows customers to take some money directly from their personal pension fund – It was not previously possible to do this. However any money taken this way is subject to standard taxation rules meaning the first 25% is tax free and the remaining 75% liable to income tax

If the customer transferred their personal pension to a drawdown contract then after transfer they could take all of the 25% tax free cash and leave the taxable part invested until they are older

So very simply, when these customers have discussed their requirements with their personal pension provider they have only been told the personal pension rules, they have not been told the flexi-access drawdown rules

While using your personal pension like a bank account may be a good idea for some, for many it could see them making unnecessary tax payments to the Government. It is clear that the customers discussed in this article only wanted their tax free cash, yet the only solution offered to them was one that would have seen a considerable and unnecessary amount of tax paid.

Our personal view is that while pension providers cannot give customers advice, they should have processes in place that identify customers who may be making a financial mistake and paying tax when they don’t need to. The Regulator is already investigating annuity sales where it believes that some providers didn’t do enough to help customers make suitable decisions and have suffered a financial loss as a consequence. This new practice of making customers who clearly only want their tax free cash believe that they are compelled to pay tax on 75% of any amount they take, has complaints, compensation and further customer mistrust in the pensions industry written all over it.  

To understand all your options in full and the flexi-access drawdown rules call us now on 020 33 55 4827.

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Drawdown Testimonials

”Considerate, conscientious and confidence-inspiring”

From the start Bob and his team let us know that they understood our nervousness about deciding what to do with our pension fund.  We were never put under any pressure to make a decision; on the contrary,  the team were considerate of our need to take our time to think about what we were doing and be satisfied that we were doing the right thing.  It didn’t seem to matter how many questions we threw at them – they always replied promptly and in as much detail as necessary and they were always ready to help further.

Indeed, we were very impressed by just how conscientious they are.   We received emails and paperwork accompanying every step we took and it would be no exaggeration to say that no efforts were spared to make sure that everything was documented down to the last detail.

Bob and his team inspire confidence and do so in a way that is friendly and familiar.  We’re confident that we’ve found someone who understands what’s going on in the pension industry and is able to help us make our own decisions about how best to invest our fund.   And we’re happy that this person is someone who’s always very approachable  and ready  to do what he can to help his clients. 

Mr V. S. - Prague
January 2015
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If you are aged 55 or over then you don't have to wait to take your tax free lump sum from your pension fund. You can release 25% of your fund Tax Free now. Call 020 33 55 4827 - Now !!
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Please Note : The new Pension Freedoms place a great deal of responsibility on the customer to make the right long term decision about their pension fund and how it is used. While Government Ministers say they "trust" people to make the right decisions, they will not have to deal with the financial consequences of a customer making the wrong decision. Your pension fund was intended to provide you with a long term income in retirement, if you take it all as one lump sum you may find yourself with little or no income during the later years of your life. This website does not give personal financial advice, you should think very carefully before making an irreversible decision. If you are in any doubt please seek independent financial advice or speak to the Governments free Pension Wise guidance service.
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