A significant warning has been issued to state pensioners regarding the withdrawal of their tax-free lump sums, following a complex case highlighted in a national newspaper.
The £1.7 Million Pension Puzzle
A 59-year-old saver, who wrote to The Telegraph seeking guidance, finds themselves navigating intricate pension regulations concerning three separate private pots. The combined value of these pots is a substantial £1.7 million.
The individual's pension portfolio consists of a defined benefit scheme valued at £891,000, a second defined benefit pot worth £86,000, and a Self-Invested Personal Pension (Sipp). The Sipp, which last received new investments in 2015, is currently valued at £691,000.
The saver understood that their total potential tax-free lump sum was likely capped at £268,275, due to the total value exceeding the old Lifetime Allowance and having no pension value protection. Their primary confusion centred on whether they could take the entire 25% tax-free entitlement solely from their Sipp, or if it had to be taken proportionately from all three pensions.
Expert Clarifies the Rules
In response, Charlene Young, a pensions and savings expert at The Telegraph, provided a clear and definitive answer. She stated that it is not possible to take the total tax-free lump sum entitlement from just one pension, such as the Sipp, even if doing so would help preserve the annual income from the defined benefit schemes.
"I’m afraid it isn’t possible to take your total tax-free lump sum entitlement (across all of your pensions) from just your self-invested personal pension (Sipp), even if it would preserve the pension from your defined benefit (DB) schemes," Young explained.
However, she offered a glimmer of flexibility, noting that the saver might be able to take most of the allowance from the Sipp, depending on specific factors. The key constraint is the 'permitted maximum' – the highest lump sum a pension scheme can pay out at a given time under the rules.
Understanding the 'Permitted Maximum'
The legislation defines the permitted maximum as the lowest of three amounts:
- The applicable amount.
- The available lump sum allowance of the individual entitled to the lump sum.
- The available lump sum and death benefit allowance of the individual.
While a pension scheme can choose to pay a member a higher sum, any amount exceeding this legislated permitted maximum will not qualify as a tax-free pension commencement lump sum. This technical distinction is crucial for retirees planning their income strategy.
This case, reported on 10 January 2026, underscores the complexity of pension withdrawal rules, especially for those with multiple pots of significant value. It serves as a critical reminder for all savers to seek professional financial advice before making major decisions about accessing their retirement funds.
