ACCA Advanced Taxation (ATX) Practice Exam

What is the maximum tax-free lump sum you can take from a pension?

1. 25% of the lifetime allowance

2. 25% of the value of the fund

3. 25% of the lower of the fund value or the lifetime allowance

4. 50% of the fund value

The correct answer is: 25% of the lower of the fund value or the lifetime allowance

The maximum tax-free lump sum that an individual can take from a pension is capped at 25% of the lower value between the total pension fund value and the lifetime allowance. This reflects a regulatory framework that ensures individuals can access a portion of their pension savings while also maintaining a balance to avoid exceeding limits set by tax legislation. When calculating this amount, if the value of the pension fund exceeds the lifetime allowance, the tax-free lump sum is determined solely based on the lifetime allowance rather than the total fund value. Conversely, if the pension fund value is lower than the lifetime allowance, the entire 25% is derived from the fund value. This provides a fair mechanism to prevent individuals from withdrawing excessive amounts without incurring tax penalties while still allowing access to a portion of their savings. The other options do not accurately encapsulate this rule, as they either misrepresent the relationship between the lifetime allowance and the fund value or provide an incorrect percentage of withdrawal. Therefore, the correct option supports the design of pension regulations, which balance withdrawal flexibility and tax considerations.