Paul Crichton
Under current pension rules, many pension funds allow members to withdraw up to 25% of their pension savings tax-free. However, the Finance Act 2023 capped this tax-free amount at £268,275, unless the individual had applied for protection at a higher level. Recent speculation suggests that this threshold could be further reduced, with figures as low as £100,000 being mentioned. This uncertainty has prompted many to make significant withdrawals from their pension funds in recent weeks.
It’s important to be aware of the anti-avoidance rules that restrict how much can be reinvested in a pension fund within a 12-month period. Specifically, pension lump sum “recycling” is limited by regulations stating that if a lump sum of more than £7,500 is withdrawn within a year, any subsequent pension contributions exceeding 30% of that lump sum will trigger penalties. A breach of this rule will mean the lump sum will be treated as an unauthorised payment and will be taxed at 40%.