Important information on pension withdrawals
Once a withdrawal has been made, it cannot be cancelled. Please make sure you understand your options and the tax implications before proceeding.
Information on pension withdrawals
If you are considering taking benefits from an ii Personal Pension (SIPP) it is important to understand that HMRC Tax Rules do not allow any withdrawal requests to be cancelled. This means that received funds cannot be returned to a pension, and the tax consequences cannot be reversed. Recent clarification from the Financial Conduct Authority (FCA) has reinforced this point and made it clear how HMRC Tax Legislation must always be applied.
Each type of withdrawal has different tax treatment; this means that requesting the incorrect type can seriously impact pension plans and retirement outcomes.
- Pension Commencement Lump Sum (PCLS) – also known as Tax-Free Cash, paid when moving all or some of a pension into a drawdown fund.
- Uncrystallised Funds Pension Lump Sum (UFPLS) – which includes a 25% Tax-Free Cash element and 75% paid as taxable income.
- Income withdrawal from a Drawdown / Crystalised Fund – which has tax applied and deducted based on individual circumstances. This can be withdrawn as a single withdrawal or monthly regular withdrawal.
Key takeaway: If you’re unsure, stop and seek Financial Advice or Guidance
If you are unsure about making a withdrawal, please do not make a withdrawal request. We recommend speaking to an authorised financial adviser or seeking guidance from the Government’s Pension Wise service.
Withdrawal types - explained in detail
- A Pension Commencement Lump Sum (PCLS), often called Tax-Free Cash, allows you to take up to 25% of your pension fund tax-free when you move some or all of your pension into drawdown.
- You can normally take up to 25% of your pension fund tax-free, the remaining drawdown fund stays invested for future withdrawals, which will be taxed as income when taken.
- Taking a PCLS without also taking additional taxable income from a drawdown fund, does not trigger the Money Purchase Annual Allowance (MPAA) – which reduces the amount you can contribute to your pension, but it will reduce, your Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA).
- You must have available Lump Sum Allowance (LSA) to receive Tax-Free Cash.
- Once paid, a PCLS cannot be reversed or cancelled.
- An UFPLS allows you to take money directly from a pension or the part of a pension you have not moved into drawdown (uncrystallised fund) without moving funds into drawdown.
- Each UFPLS payment is made up of 25% tax-free and 75% taxable income, based on your current tax rate.
- You can take one or more UFPLS payments as and when you need them, but doing so triggers the Money Purchase Annual Allowance (MPAA), which limits how much you can contribute to defined contribution pensions in the future.
- It will also reduce your Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA).
- Once taken, UFPLS payments cannot be reversed.
- You must have available Lump Sum Allowance to receive the Tax-Free Cash.
- A pension income drawdown withdrawal allows you to take taxable income from funds that have already been crystallised. This means Tax-Free Cash (PCLS) has already been taken and the remaining funds are in a drawdown / crystalised pot.
- Withdrawals can be made as a single lump sum withdrawal or regular withdrawals, such as monthly or quarterly.
- Each income withdrawal from a drawdown pot will be taxed at your marginal rate of income tax, based on your individual circumstances.
- These withdrawals do not affect your Lump Sum Allowance (LSA) and Lump Sum Death Benefit Allowance (LSDBA).
- Once taken, income withdrawals cannot be reversed or cancelled.
How can Pension Wise help?
If you’re thinking about retiring soon and want to understand your options, make sure you speak to someone at Pension Wise.
Pension Wise is part of the government’s Money Helper service, offering free and impartial pension guidance to the over-50s. They can also help you decide if transferring your pension is the right choice for you.
Find out more about retirement options
