When you use your pension savings for flexi-access drawdown with us:

• you can take your tax-free cash (normally up to 25% of your pension pot) a bit at a time or as one lump sum
• under HMRC rules, for every £1 you take as tax-free cash, £3 will move to a flexi-access drawdown (FAD) account that we’ll set up for you
• you need to have a minimum pension pot of £10,000 (or £2,000 if you’ve already taken money from your pot with The People’s Pension)
• each withdrawal from your FAD account must be a minimum of £200
• you can take 1 lump sum a tax month, for example from 6 May to 5 June – we don’t charge you for taking lump sums
• if you’re invested in multiple funds, every time you make a withdrawal, we’ll reduce your holding in each fund proportionately.

Find out more about taking your tax-free cash up front with The People’s Pension through flexi-access drawdown

When you use your savings for a lump sum (UFPLS) with us: 

• you need to have a minimum pension pot of £10,000 when you take your first lump sum (or £2,000 if you’ve already taken money before)
• each lump sum you take must be a minimum of £2,000 (or the rest of your savings in your pension pot if lower)
• you can only take 1 lump sum a tax month, for example from 6 May to 5 June – we don’t charge you for taking lump sums
• if you’re invested in multiple funds, every time you take a payment, we’ll reduce your holding in each fund proportionately.

Find out more about taking your tax-free cash across all withdrawals with The People’s Pension by taking a lump sum

Note that you get a personal allowance (the standard is £12,570 in the current tax year) of tax-free income each year. Taking large cash sums could move you into a higher tax band and give you a large tax bill – especially if you have other income on top.

The flexible lump sum you receive from us is likely to be quite a lot lower than the amount you take out of your pension savings. This is because:

• only 25% of each flexible lump sum is tax free – you pay tax on the rest.
• if HM Revenue & Customs (HMRC) hasn’t supplied us with your tax code for the current tax year, your flexible lump sum will be taxed using a temporary (emergency) rate. In most cases this will mean that too much tax will be deducted and you’ll have to reclaim the overpayment from HMRC.

– Say you take £30,000 as a flexible lump sum but you’re on an emergency rate of tax

– £22,500 is taxable, meaning you pay £8,399.61 in tax.

– So you’d get £21,600.39.

The example uses UK rates and allowances for the current tax year.

Pension Wise can give you guidance on your options.

Find out more about taking your tax-free cash up front

The amount you save into your pension pot can benefit from tax relief, as long as that amount doesn’t exceed the annual allowance in any tax year. If your taxable earnings in the year are below the annual allowance, then you can receive tax relief on 100% of your earnings (up to the annual allowance), or £3,600 gross, whichever is higher.

The annual allowance limit for the current tax year is £60,000. This limit includes all your contributions, tax relief and employer contributions across all your pension arrangements. Contributions over this limit will result in a tax charge, known as the annual allowance charge.

When you choose to take your tax-free cash up front either in chunks or a bit at a time (also known as flexi-access drawdown), you can continue to pay into your pension pot just as you do now. Once you start taking money from your flexi-access drawdown account, your annual allowance for any future savings into defined contribution pension schemes is reduced to £10,000 in the current and any future tax year. This is known as the ‘money purchase annual allowance’.

When you choose to spread your tax-free cash across all withdrawals (also known as Uncrystallised funds pension lump sums or UFPLS) your annual allowance for any future savings into defined contribution pension schemes is reduced to £10,000 in the current and any future tax year. This is known as the ‘money purchase annual allowance’.

You’ll be liable for a tax charge if your future pension savings exceed this reduced money purchase annual allowance.

Taking your tax-free cash up front – flexi-access drawdown

The first way of taking your pension pot a bit at a time is to take up to 25% tax-free cash up front either in chunks or in one go. Under HMRC rules, for every £1 you take as tax-free cash, £3 will be moved to a flexi-access drawdown account that we’ll set up for you.

Then, each time you take money out of your flexi-access drawdown account, you may pay income tax on the full amount of each lump sum. With flexi-access drawdown your money purchase annual allowance (MPAA) isn’t triggered when you take the initial 25% tax-free cash, it’s only triggered once you take your first withdrawal from the remaining balance of the 75%.

Find out more about taking your tax-free cash up-front

Spreading your tax-free cash across all withdrawals– UFPLS (uncrystallised funds pension lump sum)

The second way to take your pension pot a bit at a time is to spread your tax-free cash across all withdrawals.

So, each time you take money from your pension pot, usually 25% of it is tax free and the remaining 75% of each lump sum is taxable. If you spread your tax-free cash across all withdrawals, your money purchase annual allowance (MPAA) is triggered when taking your first lump sum.

Find out more about spreading your tax free cash across all withdrawals

These options will work differently for different people, depending on a whole range of circumstances and factors. That’s why we always recommend you get guidance and advice as well as doing your own research.

Find out more about taking your pension pot a bit at a time

The flexible lump sum is paid directly into your bank account.

• You’d lose this higher entitlement as the maximum PCLS (tax-free cash) amount for a flexible lump sum payment is usually 25%.

If you use your savings for flexi-access drawdown with us:

• You’d keep your higher tax-free cash entitlement of more than 25% of your pot if you take it up front and all in one go.
• You’d lose your higher tax-free cash entitlement of more than 25% of your pot if you take your tax-free cash in chunks.

Find out more about these 2 different ways of taking your pension pot a bit at a time

This is a complex subject and we recommend that you discuss your situation with a financial adviser.

Find out about your guidance and advice options

• ‘recycle’ your tax-free cash lump sum back into another pension scheme, you could incur a 40% charge.
• Take all or part of your pension pot, this will reduce the amount you can pay into a pension scheme (annual allowance) in the tax year. For the current tax year this would be reduced to £10,000 (this is known as the money purchase annual allowance).

You’ll usually receive 25% tax free and the remaining 75% will be taxed at your highest income tax rate.

Understand your options at retirement »

• ‘recycle’ any of your withdrawals back into another pension, you could incur a 40% charge.
• take a lump sum, this may reduce the amount you can pay into a pension scheme (annual allowance) in a tax year and still receive tax relief. For the current tax year this would be reduced to £10,000 (this is known as the money purchase annual allowance).

You’ll typically receive 25% tax free and the remaining 75% will be taxed at your highest income tax rate.

Let’s say your only income this tax year is your £30,000 pension pot and you have the standard personal tax allowance. After you’ve taken £7,500 as tax-free cash, £12,570 from the balance of your pot (£22,500) wouldn’t be taxed. This leaves £9,930 left to be taxed at your normal 20% rate – so you’d pay £1,986 in tax.

If you were earning any other income, any taxable money would be added to your other income for that year and taxed at your relevant income tax band. This could take you into a higher tax band of 40%. For example, if you earn £27,000 a year (20% income tax rate) and you then receive £30,000 taxable amount from your pension pot. This would make your total income for the year £57,000 and would push a proportion of your income into the higher tax bracket of 40%.

We are not able to give advice.  However, you can stagger your pension withdrawals over several tax years rather than taking it all in one go. This way you’ll minimise the amount of 20% or 40% tax you’ll have to pay.

Pension Wise can give you guidance on your options.