When I retired from the NHS in 2008, I received a lump sum payment from the superannuation scheme, in addition to the NHS pension. I now plan to put my SIPP into drawdown and withdraw the 25% tax-free lump sum from it.  

Do I have to declare the NHS lump sum when applying for drawdown? Does the NHS lump sum contribute to the total lump sum (including from the SIPP) which I can take tax-free?

Ian 

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

Pensions are an extremely tax-advantageous way to save for retirement. You don’t pay income tax on your contributions to a pension; there’s tax-free growth whilst investing; and when you take out your money you can take up to a quarter of it as tax-free cash, with the rest taxed as income when you withdraw it. 

But there are limits to the tax advantages you can enjoy – both on contributions and on the money you take out. 

From 2006 to 2024, the lifetime allowance limited the amount you could take out tax-efficiently from a pension. In April 2024, the lifetime allowance was abolished and replaced by two new limits. These are the lump sum allowance (LSA) which restricts the amount of tax-free lump sums you can take in your lifetime to, usually, £268,275. And the lump sum and death benefit allowance (LSDBA) which limits the tax-free lump sums you can take in your life as well as those your beneficiaries can take on your death to, usually, £1,073,100. 

WHAT NORMALLY HAPPENS

Typically, you can take up to 25% of your SIPP fund as a tax-free lump sum, moving the rest into drawdown (to keep invested or take a taxable income from) or to buy an annuity (a guaranteed income which will last your lifetime). But the amount of tax-free lump sum you can take from your SIPP will also be limited to how much LSA you have left. 

When you took your NHS pension and lump sum this would have used up some or all your lifetime allowance. The NHS scheme would have told you at the time what percentage of the lifetime allowance was used up, but you now have to convert that percentage into a monetary amount to take off the starting LSA of £268,275. 

In the standard calculation, HMRC assumes that a quarter of the benefits you took was a tax-free lump sum. So, for example, if you used up 20% of the lifetime allowance, then a quarter of 20% is 5%. And 5% of the last lifetime allowance of £1,073,100 is £53,655. This is deducted from £268,275, leaving a LSA of £214,620. 

That bit is relatively straightforward. But sometimes the cash people took from their pension was less than 25% of the total benefits. This could be the case, if, like you, they took a scheme pension from a defined benefit scheme. 

Instead, you may want to compare the actual amount of cash you received from the NHS to what a quarter of the lifetime allowance you used up gives you. 

As you took your benefits when the lifetime allowance was much higher (in the 2008-2009 tax year the lifetime allowance was £1.75 million) your actual cash could be much higher. If it’s higher, as I suspect it will be, then you may want to accept the standard calculation as it will give you the ability to take more tax-free cash from your SIPP. 

APPLYING FOR A TRANSITIONAL TAX-FREE CASH CERTIFICATE

If it is less, you may want to apply for a ‘transitional tax-free cash certificate’. This works out the LSA used up by deducting the actual amount of tax-free cash you received, which is fairer than deducting an assumed amount. But a word of warning. If you think you need a certificate then you must apply for one from your pension scheme (either the NHS scheme or the SIPP) before you take any more lump sums out of pensions on or after 6 April 2024. And you need to be certain a certificate is the right solution for you as you can’t reverse it. 

Remember, you can only take a quarter of your SIPP fund as tax-free cash if that is less than your remaining LSA. If this sounds too complicated, you may want to ask your pension scheme for more information or employ a financial adviser to help you navigate this. 

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