By Justin Rourke

17th January 2024

Can I still have my 25% tax-free pension lump sum?

There are a number of very good reasons to use a pension as a savings vehicle for retirement, and potentially as a vehicle to pass wealth to future generations.

Not only do pensions benefit from several attractive tax incentives, but there were also a handful of positive legislation changes introduced in 2023 that allow you to save more or take more out of your pension before facing a tax charge.

Changes to pension legislation

• Increased annual input allowance of £60,000
• Increase of Money Purchase Annual Allowance to £10,000
• Annual taper allowance has increased with the adjusted income limit now at £260,000 (and the reduction cannot drop below £10,000 as the minimum tapered annual allowance has increased, up from £4,000. 
• Abolition of lifetime allowance tax

Pensions tax incentives

• Income tax relief on contributions for basic and higher-rate taxpayers
• Growth in pension predominantly net of tax
• Assets in a pension are generally exempt from Inheritance Tax (IHT)
• Unused pension assets can be passed on to beneficiaries
• A tax-free lump sum from the pension pot

This final point raises a question many often ask - “can I still have my 25% tax-free cash lump sum?”

The answer is not as simple as it once was. In recent years the 25% Pension Commencement Lump Sum (PCLS) was linked to the Lifetime Allowance (LTA). Whilst the LTA tax charge has been abolished, the PCLS maximum is linked to the former LTA charge number of £1,073,000.

In simple terms, if your pension savings are less than £1,073,000, and you wish to take a lump sum, then you will still get 25% of the pot tax-free, up to a maximum of £268,250. However, if you have more than £1,073,000 in your pension, the tax-free element will be less than 25%.

The table below shows how higher pension values impact the PCLS.

The new legislation makes no provision for the maximum PCLS to increase and there is no link to inflation.

While this pension wrapper holds a great deal of value, it is imperative that your objectives are matched to the options at your disposal.

Changes to Capital Gains Tax

The recent changes in legislation are not restricted to pensions. We have also seen the Capital Gains Tax (CGT) regime change dramatically with the Annual Exempt Amount (AEA) - the amount of gain you can make in a tax year when selling or gifting assets before tax is due - set to reduce by more than £9,000 than what it was in 2022/2023.

As a result, many personal or private investors will find themselves needing to complete a personal tax return and to pay CGT on their share and investment portfolio when gains exceed £3,000 from 6^th April 2024.

The legislation states that “for the tax year 2024 to 2025 and subsequent tax years the AEA will be permanently fixed at £3,000 for individuals and personal representatives, and £1,500 for most trustees.”

Often financial advice is mistaken for fund management, but that is not the skillset or domain of a financial planning consultant. Regular reviews allow you to be guided by your adviser through these complex changes in legislation with your personal goals and objectives at the heart of advice.

There are a number of investment tax wrappers available for advisers and investors to use, and being in the correct one, at the correct time, can make a significant difference to your financial planning, therefore, with the recent changes outlined above, the value of a regular financial review with a trusted adviser has never been greater.