Here is the theory….
- You pay £8,000 into a defined contribution pension fund
- Its topped up by £2,000 (tax back from the government)
- So that’s £10,000 in your pension pot
- You take out £2,500 (25%) tax free
- You then pay 20% tax on £7,500 = £1,500
- So £8,000 in + £2,000 credit – £1,500 tax = £8,500 which is £500 more than you paid in
This is based on the HMRC rules.…
You must be at least 60 years of age to take your pension pot as a lump sum.
You may qualify to take all of your pension pot as a lump sum if:
one of your pension pots is worth £10,000 or less
If a lump sum is paid instead of a small pension before you started to get that pension, only 75 per cent of the lump sum is taxable.
There will be some charges from your pension provider but these should be small, take look at this list for a comparison
ABI data suggest that 25% of pension pots are less than £10,000