Retirement - frequently asked questions

Your questions answered.

The maximum amount of tax-free lump sum an individual can take from a retirement annuity contract is the lower of:

  • 25% of the value of the plan.
  • Any remaining lump sum allowance.

It was not possible for individuals to protect any entitlement to more than 25% tax-free lump sum they had before 6 April 2006 (A-Day).

Individuals who didn't opt for transitional protection, and had the right to more than 25% of their benefits value at 5 April 2006 as a tax-free cash lump, can have the higher percentage paid when they crystallise their benefits. They didn't have to register this unless they were also applying for primary or enhanced protection. The higher tax-free lump sum amount is based on the amount of tax-free lump sum at 6 April 2006 (A-Day) increased by 20%.

Individuals must become entitled to all of their pension and lump sum rights (that were not in payment on 5 April 2006) under the scheme on the same day.

PTM63130: scheme-specific lump sum protection - overview

Under all of the following types of ill-health the trustees of the scheme will need to obtain medical evidence that proves the individual is incapable of carrying out their job because of physical or mental impairment.

  • Ill-health

It's possible for individuals to take their benefits before age 55 in the case of ill-health.

The scheme administrator has medical evidence that the individual is, and will continue to be, medically incapable (either physically or mentally) of continuing their current occupation as a result of injury, sickness, disease or disability, and as a result of the ill-health the individual ceases to carry on that occupation.

The normal tax-free cash rules apply to the benefits paid.

The annual allowance applies in the year benefits are taken.

  • Severe ill-health

It's possible for individuals to take their benefits before age 55 in the case of severe ill-health.

The individual is unlikely to be able to do any type of gainful work, other than in an insignificant way, before state pension age.

The normal tax-free lump sum rules apply to the benefits paid.

The annual allowance does NOT apply in the year they are taken.

  • Serious ill-health

It's possible for individuals to take their benefits as a lump sum before age 55 on the grounds of serious ill-health.

Before this can be done, the trustees will need to obtain medical evidence that the individual's life expectancy is less than one year. The amount of serious ill health lump sum that can be paid is capped by the individual’s remaining lump sum and death benefit allowance.

All uncrystallised benefits must be taken from that arrangement.

If they're under age 75, the individual will receive the benefits tax-free.  If they're 75 or over the benefits they'll be taxed at their marginal rate of income tax.

The annual allowance does NOT apply in the year they are taken.

In all of the above cases restrictions apply to Guaranteed Minimum Pension benefits.

PTM051200 - when the annual allowance charge does not apply

PTM062100 - Early payment of benefits on health grounds

PTM063400 - lump sums: serious ill-health lump sum

The normal rules for taking benefits on any of the ill-health basis still apply but there are different rules apply depending on the type of contracted out benefits.

Section 9(2B) rights, also known as Reference Test Scheme benefits, can be taken early on the grounds ill-health. A tax-free cash lump sum can be paid as normal.

Guaranteed Minimum Pension benefits can only be taken on the grounds ill-health if the revalued GMP at age 65 for men and at age 60 for women is met. No tax-free lump sum can be paid from the GMP benefits.

For both, an amount must be retained to provide for a survivor's pension on death if the individual is married or has a civil partner.

A: Before 6 April 2006, pension plans for professional sports people could have a lower-than-normal minimum pension age. HMRC maintained a list of these occupations; for example professional football players could retire from age 35 and this entitlement could continue after that date.

Pension plans taken out after 6 April 2006 normally can't include a minimum pension age of earlier than age 55 even for sports people. However, if a plan with a low pension age is block transferred into a new plan, the low pension age is protected and applies to the new plan.

Where an individual has a protected pension age of less than age 50 and a relevant benefit crystallisation event occurs before age 50, their lump sum allowance and lump sum death benefit allowance will be reduced to reflect this. The reduction will be by 2.5% for each year before age 55. Previously the lifetime allowance was reduced in the same way.

There is no reduction for relevant benefit crystallisation events that occur after age 55.

PTM062220 - Member benefits: pensions: protected pension age: right to take benefits before age 50

DWP will assume they’re receiving a ‘notional’ income from their drawdown plan and calculate the Pension Credit (and any other means-tested benefits they receive) accordingly, regardless of the amount of drawdown income they're actually taking. ‘Notional’ income is an amount equivalent to the income the individual would receive if they had bought an annuity. DWP will also take capital of more than £10,000 into account, so their tax-free cash could also have an effect.

If it's uncrystallised, tax-free cash will still be available (subject to the lump sum allowance), the rest is taxed as income at the individual's marginal rate of income tax. Of course this could in itself push them into the higher rate or even additional rate tax bracket.

Disclaimer

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.