I have two pensions, a BT pension (defined benefits, which I have started to draw from) and a SIPP which is yet to be crystallised.

At the time of starting to take my workplace pension in 2022/23, I was told that this amounted to 27% of LTA (lifetime allowance). I took a lump sum as well as a monthly payment. I understand that in 2024 the LTA was removed and replaced with a maximum tax-free lump sum of £268,275.

Are you please able to explain how I can take out lump sums from my SIPP and know how to calculate this tax-free lump sum, and how the amount I took out previously from the workplace pension is incorporated into this tax-free lump sum.

My apologies in advance if I have mixed up terminology - but I do find pensions quite confusing!

Lily

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

You are right – pensions are confusing at times Especially when the tax rules change, which is what happened in April 2024.

When the lifetime allowance (LTA) was abolished in April 2024 it was set at £1,073,100. It was replaced with a new set of rules which included two main limits on the amount of tax-free lump sums you can take.

The first is the lump sum allowance (LSA) which is the total amount of tax-free lump sums you take in your life. This is usually set at £268,275.

The second is the lump sum and death benefit allowance (LSDBA) which is the total amount of tax-free lump sums you took in your life plus those paid out on your death. This is usually set at £1,073,100.

WHERE TO START

When you are working out the tax-free lump sums you can take you need to start with £268,275 (unless you previously applied for some form of lifetime allowance protection, and in that case it may be higher) and then deduct from that 25% of the amount of lifetime allowance you used up previously, as at 5 April 2024.

You said you used up 27% of your lifetime allowance, so the amount you’d deduct would be £72,434.25 (£1,073,100 x 27% x 25%). This means you now have £195,840.25 of your lump sum allowance remaining (£268,275 - £72,434.25).

This calculation assumes you took 25% tax-free cash when you accessed your pension. If you didn’t, either because of the way the rules of the scheme worked or because you chose not to, you might want to consider if a transitional tax-free amount certificate could help you. This certificate allows you to deduct the actual amount of tax-free cash you received instead, so you could end up with more lump sum allowance left over.

Whichever option you choose, this will give you a new balance for your lump sum allowance. Then, every time you take some part of your SIPP you can usually take up to 25% of that as a tax-free lump sum. You then simply deduct that amount from your starting LSA figure. Once you run out of LSA you won’t be able to take any more tax-free cash, and the rest of your pension will be subject to income tax when you draw on it.

APPLYING FOR A CERTIFICATE 

If you think you might want to apply for a certificate, you need to do so before you take any tax-free lump sums from any pension after April 2024. It may be worthwhile speaking to a financial adviser who could provide you with personalised advice to check if it’s right for you. Or, you could contact Pension Wise, a government-backed service provided by MoneyHelper which provides free, impartial pension guidance which may help you make a decision.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to askrachel@ajbell.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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