Throughout your working life, you will have made National Insurance contributions (NICs) to receive the government State Pension when you retire. 

Alongside your State Pension entitlement, you’ll have your workplace and private pensions too. As an incentive for employees to fund their own life after work, these pensions are particularly tax-efficient. 

Not only do you receive automatic tax relief on the contributions you make (with further relief available for higher earners) but you can receive tax-free cash at retirement too.

For defined contribution (DC) pension plans, your tax-free tax entitlement generally stands at 25% of your fund, up to a maximum of 25% of the Lifetime Allowance (LTA). But what now for tax-free cash following the abolition of the LTA? 

Keep reading to find out.

You have many choices to make at retirement, including whether or not to take tax-free cash

Long-term financial planning isn’t easy. It’s why we’re always on hand to help.

You need to think about your long-term goals, including your dream retirement. Then you’ll have to factor in how your financial decisions throughout your working life will ensure those goals are attainable.

Being sure to have 35 qualifying years of NICs will ensure you receive your full State Pension entitlement, but that alone is unlikely to provide the lifestyle you want. You’ll need to make regular payments into a workplace pension, and possibly a private pension too.

Thankfully, these options are both incredibly tax-efficient. Not only do you receive relief on contributions, but you can claim tax-free cash at retirement too. How, when, and if you do so, will depend on the option you choose and the type of retirement you want.

You will likely have a 25% tax-free cash entitlement from your DC scheme at retirement

Following the 2015 introduction of Pension Freedoms legislation, you have several DC pension options and different ways to access your tax-free cash entitlement. 

An Annuity

Often thought of as a traditional retirement choice, the annuity option uses your amassed pension pot to buy a guaranteed income for life. This is perfect if you want to keep budgeting simple and anticipate a fairly regular level of expenditure.

If you do have one-off expenses, or big-ticket items to purchase, you might use your tax-free cash entitlement to pay for these.

You can opt to take a pension commencement lump sum (PCLS) of up to 25%, payable as soon as your annuity is purchased. You can usually take any amount up to 25%, but the more you take, the less money will be left to purchase an annuity and the lower your regular income will be.

Flexi-access drawdown

As the name suggests, flexi-access drawdown is much more flexible and allows you to drawdown income as and when you need it. This is great for covering fluctuating expenditures but does put you in sole charge of your budgeting (with a little help from Expert Wealth). 

Again, your maximum tax-free entitlement is 25% of your overall fund but you can usually choose whether to take the full amount in one go or to receive a tax-free element in each withdrawal you make. 

Uncrystallised funds pension lump sum (UFPLS)

An UFPLS is a lump sum (or a series of lump sums), of which 25% is paid as tax-free cash, with the remainder taxed as income. 

If you have multiple pension pots, you might choose different options for each. That could allow you to receive a regular income from one, to cover fixed and known expenses, freeing you up to be more flexible with others.

A single lump sum payment could be great for covering one-off expenses like around-the-world travel or house renovations, but – even with a 25% tax-free cash entitlement – the tax payable on the remaining 75% could be high and means this won’t always be the right option.

Without HMRC protection, your maximum tax-free cash amount remains the same post-Budget 

The maximum amount of tax-free cash you could take has previously been capped at 25% of the LTA. This remains the case, despite Jeremy Hunt’s decision to scrap the allowance.

As discussed in your spring Budget update, the LTA still exists (albeit with charges set to 0%) and will only officially cease in 2024. For now, it remains at its 2022/23 level of £1,073,100 and is likely to be frozen at this amount thereafter.

That means, without any form of HMRC protection, the maximum tax-free cash you can take in most cases will be £268,275 (25% of £1,073,100).

If you think you might have LTA protection, be sure to check in with us before you make any retirement or tax-free cash decisions.

It is also worth noting that if you belong to a defined benefit (DB) scheme, your tax-free entitlement could be higher than 25% of your plan’s cash-equivalent transfer value, so again, be sure to speak to us.

Get in touch

With decades of experience, our Chartered Financial Planners have the expertise to help you plan your retirement your way. If you have any questions, please get in touch and speak to us today.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.