AJ Bell pensions expert Tom Selby responds to a reader trying to understand the rules around tax on retirement pot withdrawals
Thursday 22 Apr 2021 Author: Tom Selby

My pension is fully crystallised, but I only took around 12% tax free at the time I crystallised it. Can I still take a further 13% tax free?


Tom Selby, AJ Bell Senior Analyst says:

The term ‘crystallised’ is one that comes up often in questions about pensions, and just means choosing a retirement income option, which you can do once you reach the ‘normal minimum pension age’ of 55.

This is the earliest point someone with a defined contribution scheme, such as a SIPP, can access their fund. The Government is currently consulting on raising the normal minimum pension age to 57 by 2028.

In most cases crystallising will take one of three forms:

Buying an annuity from an insurance company. This will pay a guaranteed income for life, with up to 25% of the fund available tax-free at the point the annuity is purchased. The income you receive might be higher if you have a life-limiting illness or lifestyle factors which might mean they expect you to live less long, such as smoking.

Entering drawdown. Under this option, your fund remains invested, and you are in charge of managing your retirement income strategy and withdrawals. This has the benefits of extra flexibility and the possibility of long-term investment growth, although your fund may go up and down and you will have responsibility for ensuring your income is sustainable. At the point you enter drawdown, up to 25% of your fund will be available tax-free, with any other withdrawals taxed in the same way as income.

Taking ad-hoc lump sums. This avenue of crystallising your fund allows you to take individual lump sums from your retirement pot, with a quarter of each lump sum tax-free and the rest taxed in the same way as income.

Lots of people will also opt for a combination of the above options. Crystallisation is important because, as you allude to in your question, this is when you become entitled to your 25% tax-free cash.

Once someone has crystallised their entire fund, unfortunately there is no going back – so anyone wanting to take their full 25% tax-free cash entitlement needs to do so at this point.

For anyone who doesn’t want to crystallise their entire pension, partial crystallisation could be an attractive alternative. This simply involves picking a retirement income route for some, but not all, of your pension.

This is probably easiest to illustrate with an example. Take someone with a £100,000 pension who wants to access £5,000 tax-free cash to renovate their kitchen. Rather than crystallising their entire fund in drawdown – generating £25,000 tax-free cash – they could choose to crystallise just a £20,000 portion.

This would generate the £5,000 of tax-free cash they need, with £15,000 going into drawdown and the remaining £80,000 left untouched. They would then be entitled to 25% tax-free cash from that part of their fund once they decide to crystallise it.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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