ACCA Taxation (F6) Practice Exam

What is the maximum tax-free lump sum that can be withdrawn from a pension fund?

1. 20% of the pension fund

2. 25% of the lifetime allowance

3. 30% of the pension fund

4. 50% of the lifetime allowance

The correct answer is: 25% of the lifetime allowance

The maximum tax-free lump sum that can be withdrawn from a pension fund is based on 25% of the lifetime allowance. The lifetime allowance is the maximum amount of tax-advantaged savings you can accumulate in your pension without facing extra tax charges. By allowing a withdrawal of 25% of this allowance, it offers individuals a significant tax benefit while enabling them to access some of their retirement funds. This rule helps to encourage saving for retirement while ensuring that larger sums are retained within the tax-advantaged framework of the pension scheme. In contrast, withdrawing a flat percentage of the pension fund itself would not accurately represent the regulations surrounding pension savings, which take into account the overall limit set by the lifetime allowance. This structure is designed to maintain a balance between facilitating access to funds and ensuring that pensions are used primarily for their intended purpose—providing income in retirement. Thus, understanding the lifetime allowance is key to planning withdrawals from pension funds.