I took my pension from my defined benefit scheme in 2017. At the time I chose not to take any cash lump sum.

I also have a SIPP which I have not yet touched. So, my question is – can I take a quarter of my SIPP as tax-free cash?

Robin

Rachel Vahey, AJ Bell Head of Public Policy, says:

A few weeks ago, I explained the lifetime allowance is being abolished from April this year and replaced with two new allowances – the lump sum allowance and the lump sum and death benefits allowance which limit the amount of tax-free lump sums pension savers and their beneficiaries can receive.

Those who have already taken some of their pension before 6 April 2024 but also want to take some more pension afterwards are subject to special rules. A calculation is needed to help these people work out how much of these two allowances they have left (given they have already taken some of their pension benefits).

The standard calculation assumes everyone took 25% of their benefits as tax-free cash. But that isn’t always the case. Sometimes people take less than that: because that’s the way the pension scheme rules worked, or perhaps because they chose not to take any cash or chose to take a lower amount.

These people would be unfairly treated under the standard calculation so HMRC is going to let them apply for a certificate that would put them in the correct tax position.

Instead of applying a straight 25%, the certificate shows the exact amount of tax-free lump sums a pension saver has already received. If they give the certificate to a pension scheme when they first take pension benefits after 6 April 2024, the pension scheme will work out their correct lump sum allowance.

HOW IT WOULD WORK IN PRACTICE

The easiest way to explain this is through an example.

If a pension saver had already taken a pension from their scheme but no cash, and in doing so used up 70% of their lifetime allowance, then the standard calculation would work out their remaining lump sum allowance as:

£268,275 – (25% x 70% x £1,073,100) = £80,483

That is unfair. It reduces their lump sum allowance when they have not taken any tax-free cash.

If they apply for a transitional certificate from their pension scheme then this would show they have not taken any tax-free cash at all. They would then be entitled to their full lump sum allowance of £268,275.

This may sound a perfect solution, but I strongly urge all readers to proceed very carefully if they think this may be right for them. Once they have applied for a certificate, there is no going back, they cannot cancel it or ignore it.

In some cases, savers may find they get back more tax-free lump sum allowance by relying on a certificate. In other cases, they may find their allowance is lower by using the certificate. But by that point it is too late.

Pension savers must think very hard before applying and ask a regulated financial adviser for help if they need it.

NEED FOR ‘COMPLETE EVIDENCE’

If they do want to apply for a certificate, they will need ‘complete evidence’ of all the tax-free lump sums they have already taken from their pension scheme. This may mean going back to the scheme and asking for confirmation from them on some details.

A certificate can only increase a pension saver’s lump sum allowance. They will still be restricted to taking a quarter of any untouched pension pot as tax-free cash and will need enough untouched pension funds to take advantage of any higher limit.

Pension savers can apply for a certificate from any scheme they are a member of – including the scheme they originally took their pension benefits from before April 2024, or the scheme they want to take pension benefits from for the first time from this April.

Finally, they need to apply for a certificate before they take a lump sum from their pension scheme after 6 April 2024. Once they have taken a lump sum the window to apply for a certificate is closed.

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