Can I take my 25% tax-free pension lump sum in separate slices? STEVE WEBB replies

I'm approaching 55 and have the option to take 25 per cent of my private pension in December.

I'm still employed and have some savings, but would like to take a lump sum of maybe 10 per cent?

Is this possible and can I tap into the remaining 15 per cent anytime I want to in the next few years?

Also who controls when and how much I take?

Is my pension provider controlling when I reach 25 per cent or is it the DWP for example?

Steve Webb replies: Many of the restrictions around drawing money out of a pension arise from the fact that you get a tax break when you put money into a pension.

In return for this, HM Revenue and Customs get a say in how you take the money out.

On top of this, there can also be rules specific to your individual pension scheme.

The way the system works depends on the type of pension which you have.

With modern 'pot of money' or defined contribution pensions, the basic principle is that you can take out up to a quarter free of income tax. The balance is subject to income tax when you take it out.

However, since the introduction of 'pension freedoms' in April 2015, you can access your pension in two different ways (assuming you don't simply want to take the whole lot in one go), and the tax treatment is different depending on which you choose.

One option is simply to take (up to) a quarter of your pot immediately as a tax-free lump sum and leave the rest in a 'flexi-access' drawdown account.

The alternative is to move your entire pension pot into a different sort of drawdown (known as UFPLS or 'Uncrystallised Funds Pension Lump Sum'), where every withdrawal is one quarter tax free and three quarters taxable.

In both cases, as soon as you make a taxable withdrawal, your annual allowance for further pension contributions would drop to £10,000 a year - a rule aimed at deterring pension recycling.

If we assume that you are planning the first of these options, I'm afraid there isn't a simple mechanism to take a smaller percentage tax free and then come back for the rest later.

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But if you want to maximise your tax-free cash and don't need all the money now, one option would be to take the full 25 per cent and invest the part you don't need now in something like a stocks and shares Isa.

This would allow you to go on getting tax-free investment growth on the balance of the 25 per cent you have withdrawn.

Turning now to more traditional salary-related or defined benefit pension arrangements, the option of a tax-free lump sum is also available.

But the way it is worked out is slightly different and can vary from scheme to scheme.

In some cases, in a defined benefit pension scheme the lump sum on offer is on a take-it-or-leave-it basis, and you have no option to vary the amount.

But in other schemes you can choose the combination of tax-free lump sum and regular scheme pension that you want to receive, subject to the overall limit of tax-free limit of 25 per cent of the total value of your pension.

As ever, the important thing is to read the scheme rules and contact the scheme directly if you have any questions about your options.

You should also be aware that some DB schemes require you to give up a relatively large amount of scheme pension for every pound of lump sum, so you should check carefully before deciding how much lump sum to take.

Finally, although you are in the fortunate position of still being able to access your pension at 55, a reminder to others that the 'normal minimum pension age' will rise for most pensions to 57 over night on 6 April 2028. You can read more about the transition from 55 to 57 here.