If you take the entire defined contribution pension as a lump sum at retirement, what percentage of the lump sum is typically tax-exempt?

• A. 0%
• B. 25%
• C. 50%
• D. 75%

Answer: (B)

When you retire from a defined contribution pension, you typically can take up to a 25% tax-free lump sum of the pot. The rest is not tax-free and is added to your income for that year, taxed at your marginal rate. So even if you take the entire pot as a lump sum, only 25% is exempt from tax; the remaining 75% is taxable. For example, with a £100,000 pot, £25,000 would be tax-free and £75,000 would be subject to income tax.