Tax planning with the pension PCLS

Phased Retirement & Pension Tax Planning

The Pension Commencement Lump Sum (PCLS) is the tax-free amount you can take when you open your pension. The minimum pension age for UK pensions is currently 55 years. Certain exceptions may apply, such as for sportspeople or the seriously ill.

The retirement lump sum available under a final salary scheme is pre-defined and must be taken at-retirement or not at all. While a benefit, it doesn’t offer planning options for the long-term.

With a modern private pension, the PCLS can be used to great effect. A Self-Invested Personal Pension (SIPP) offers 25% of its fund value to be taken as a tax free lump sum. In practice, this can be taken as 25% of the fund value at once, or can be withdrawn over time – across tax years.

If you don’t need the lump sum in your hands, to repay your mortgage or for a large purchase, it can be used more effectively.

Taking a pension lump sum over time is termed ‘Phased Retirement’

Phased Retirement is an optimal withdrawal method for pension income tax planning

Below is an example of Phased Retirement in practice.

Example: Retiring with a SIPP of £500,000:
  1. If you wanted to maximise your PCLS
  • You could take 25% of the £500,000 immediately as an immediate, and full, lump sum
  • That means you could have £125,000 straight away, free of tax, to do whatever you like with
  • The remaining £375,000 would be taxed as income whenever it is taken out – you can usually choose your income level
  • That means if you take £15,000 pa, you would be a 20% taxpayer on any income amount over your Personal (0%) Tax Allowance
2. If you didn’t need that full PCLS all at once
  • You could withdraw your PCLS gradually alongside your pension income
  • To do this, you could instruct your pension provider to pay your income under Phased Retirement, meaning it is 3 parts ‘income’ to one part ‘PCLS’. Your pension provider would declare this as a use of Uncrystallised Funds Pension Lump Sum (UFPLS)
  • That means that for every amount you withdraw, 25% is PCLS and therefore not subject to tax and 75% is taxed as income
  • So, were you to take £15,000 pa from your plan , 25% would be tax free and 75% subject to income tax
  • That would mean of the £15,000 pa income, only £11,250 would be subject to tax and £3,750 arrive free of tax. This would mean you pay no income tax at all as you would be within your Personal (0%) Tax Allowance (subject to your income tax position and other income).

Other Pension Planning Considerations

Another important part of withdrawal planning is consideration for death taxes. If you withdraw a lot of money from your pension and just put it in the bank – it is in your personal estate and subject to inheritance tax. If you leave your funds within the pension as long as possible, it will benefit from the more favourable pension death taxes.

A professional regulated adviser will be able to help you with your lump sum, withdrawal and tax planning to ensure an efficient and healthy retirement.


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