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Question: I retired as an Assistant Chief Constable aged 49 in 2016 after 30 years’ service. I took 25 per cent of my pension pot tax free which was just under £300,000 and faced a tax charge due to this. Having been to University full time after retiring, I began another career working three days a week in education. Can I take any of my teachers pension as a tax free lump sum, or as I have used up all my tax-free allowance from my previous pension, am I prevented from doing so? Also, ideally, I would like to use all of my teachers pension as a ‘bridge’ between finishing work and taking my state pension in about 7 years. Is it possible to do that or is my teachers pension not flexible in that sense?
Answer: The lifetime allowance was created from 6 April 2006 and was a limit on the amount of money an individual could take out of their pensions with no additional tax charges. Originally set at £1.5m, it increased steadily to £1.8m, but then fell in stages, to a low of £1m in 2016, before it edged up over time to £1,073,100.
When someone withdrew more than their lifetime allowance from a pension, an extra tax applied: 25 per cent on any excess taken as income, or 55 per cent if it was withdrawn as a lump sum.
Some individuals may have applied for lifetime allowance protection, which gives them a higher personal limit and they would face tax charges on benefits exceeding that limit.
In April 2024, the lifetime allowance was abolished and was replaced by two new main limits. The lump sum allowance was set at £268,275, which is the most tax-free cash people can take from their pension in their life.
The lump sum and death benefit allowance is the maximum tax-free cash people can take during their life, and their loved ones can receive on death, and was set at £1,073,100. Anyone with lifetime allowance protection would have higher limits.
Anyone who received tax-free cash before 6 April 2024 must consider those lump sums when calculating their remaining lifetime allowance. It appears that you may have used up 100 per cent of your lifetime allowance, so under the standard calculation it appears you would have also used up 100 per cent of your lump sum allowance and can’t take any more tax-free cash.
There is an alternative option which may allow some additional cash to be paid in some circumstances by applying for a certificate. However, a strong word of warning – this area is very complex, so it’s wise to consult your pension scheme or seek advice from a financial adviser.
The Teachers’ Pension Scheme is a defined benefit scheme which means it will pay you an income for life based on how long you work as a teacher and your salary. Some members can choose to reduce their pension income to take a lump sum. They can take up to 25 per cent of all their pension benefits as tax-free cash, as long as they have a sufficient lump sum allowance remaining.
Members can also pay into a separate additional voluntary contributions (AVC) pot. This is a defined contribution pension which means the value of the final pot of money depends on how much the individual pays in and the investment return.
The member can usually take up to 25 per cent of the pot as cash and use the rest to provide an income. But again, the amount of lump sum they can take tax-free is restricted by how much lump sum allowance they have remaining.
If an individual has no remaining lump sum allowance, then they cannot take any further tax-free cash from either the main scheme or their AVC pot. But they may be able to take a taxed lump sum if the scheme allows.
If they have a small amount of lump sum allowance remaining, then they may want to take the tax-free cash from the AVC pot first and then, if that doesn’t use up all the remaining lump sum allowance, think about reducing their main scheme income to give them an additional tax-free lump sum.
There are different pension ages depending on when you joined the teachers’ pension scheme, but those who joined more recently have a normal pension age of 65. They can choose to take income earlier, but their income will be reduced.
However, you can take your AVC pot from age 55 (rising to age 57 from 6 April 2028). This could provide you with income to ‘bridge’ the gap until you receive your main scheme income and/or your state pension at age 67.
Once you have taken any tax-free cash, you can use the pot to buy an annuity (which is a guaranteed income for life), or to draw down an income either regularly or when you need it.
Or alternatively you could take the pot through a single or multiple lump sums – you will be able to take 25 per cent of each lump sum as tax-free cash (depending on how much lump sum allowance you have left) and the rest will be taxed as income.
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