Tax Free Lump sum at 65 - Is it all or nothing ?

[patfish]

So the usual figure being bandied about from a pension is max 25%. Can you decide to just take 5% or 10% or some other figure in between ? I have a pension pot worth about 300k and would like to take just 30k and leave the rest in the ARF pot so to speak. Also if I take an annuity would that make any difference ?

 

[jpd]

What type of pension fund are you talking about - defined contribution, defined benefit, PRSA, etc?

 

[Conan]

Assuming you are in a Defined Contribution scheme, I cannot see why you would not take the max tax-free lump sum. Any money you leave in the ARF (or buy an Annuity) will potentially be taxable (at least in part) , depending upon your overall income in retirement.

 

[ClubMan]

So the usual figure being bandied about from a pension is max 25%. Can you decide to just take 5% or 10% or some other figure in between ?

Yes, but as others have said it would be unusual for it to be advantageous not to take the maximum tax free lump sum. If it's of any use you may be able to take the 25% in different chunks at different times by fragmenting your single pension policy into multiple smaller policies in some cases. That's what I'm doing with multiple PRSAs rather than retirement of my pension being a one time/one shot thing.

 

[Dr Strangelove]

It depends a bit on estate planning. I would see a few situations where it’s better to take less than 25%:

1) if your spouse is significantly younger than you (say a decade or more). It makes sense to leave as much as possible accumulating in the ARF tax free so that spouse can take advantage of it as you will likely predecease them.

2) if your ARF is so big you think you’ll never use it all and want to bequeath it. It grows tax-free and then on death it gets taxed at 30% and then distributed to your heirs.

3) if your ARF is small and you’re only paying 20% marginal rate on income in retirement it’s reasonably tax efficient to not take the lump sum and draw down more heavily later.


All of the above depends on real investment returns of 5%. Very likely with equities over decades but extended periods of lower returns are possible. Look up threads on “sequence of returns” and “bomb out risk”.

But for most people it’s a good idea to take the 25% tax free and use it to renovate the house, pay off all debts, and buy a new car.

 

[conor_mc]

Would be great to see the mooted changes to ETF taxes, particularly I think if it switched from exit tax to CGT. You’d have another tax credit to utilise in retirement in that case. It would make it more attractive to reinvest some of a TFLS in ETF’s (although you could already do this in a basket of shares) and drawdown outside of the income tax net.