UFPLS & Income Tax Question

If I have no other income and take an amount equal to my Tax Free Personal Allowance from my Pension Pot as a UFPLS each year will I be able to re-claim any Tax deducted by the Pension company from HMRC? And can I keep doing this until my Pension Pot is exhausted thus taking it all Tax Free, providing I can afford to live on my Tax Free Personal Allowance?

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  • Linton
    Linton Posts: 17,061
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    You get 25% of the UFPLS tax free anyway and the rest would be free of tax upto the tax allowance - exactly the sames as if the UFPLS after 25% deduction was wages. After the first year HMRC should get the tax code right so that tax is never deducted in the first place.
  • jamesd
    jamesd Posts: 26,103
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    Yes.

    But you can make your life a bit easier by taking the tax free lump sum and placing all of the rest into drawdown, then setting up a monthly payment from the drawdown pot that will use your personal allowance over the year. The first month's payment will have too much tax deducted, then HMRC should issue a new tax code to take care of it. Once you've received the first payment you can tell HMRC about your anticipated income for the tax year to help them to get it right.

    You can decrease the payment amount for the new tax year to stay on target with the extra number of months in a full tax year.

    Taking the whole tax free lump sum up front can help on the income side since you can do things like investing the money to generate some extra income, perhaps inside an ISA.
  • jamesd
    jamesd Posts: 26,103
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    Also do remember to continue to make pension contributions since you can make £720 a year of tax free income from doing it.
  • brewerdave
    brewerdave Posts: 8,499
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    jamesd wrote: »
    Also do remember to continue to make pension contributions since you can make £720 a year of tax free income from doing it.


    ...but if your only income was from drawdown of a pension,would this not fall foul of recycling rules ???
  • jamesd
    jamesd Posts: 26,103
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    brewerdave wrote: »
    ...but if your only income was from drawdown of a pension,would this not fall foul of recycling rules ???
    No. To see why just look at the recycling rules. I gave a summary in the link I included in my earlier post.

    The easiest limit is £7,500 of tax free lump sum taken within a rolling twelve month period. Easy to stay within that one when the most you can pay in is £3,600 gross. If that one would be exceeded then the rest of the rules can be checked.

    The greatest chance of going over the limits is at the start if a large lump sum is taken from existing pots. Then the 30% of the lump sum or increase of more than 30% rules can be used to stay within the limits. Be within any of the limits and it's fine, you have to be outside all of them.
  • Shylock
    Shylock Posts: 53
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    jamesd wrote: »
    Yes.

    But you can make your life a bit easier by taking the tax free lump sum and placing all of the rest into drawdown, then setting up a monthly payment from the drawdown pot that will use your personal allowance over the year. The first month's payment will have too much tax deducted, then HMRC should issue a new tax code to take care of it. Once you've received the first payment you can tell HMRC about your anticipated income for the tax year to help them to get it right.

    You can decrease the payment amount for the new tax year to stay on target with the extra number of months in a full tax year.

    Taking the whole tax free lump sum up front can help on the income side since you can do things like investing the money to generate some extra income, perhaps inside an ISA.

    James, thanks for taking time to reply. TBH I'm failing to see the attractiveness of swapping it to a Draw Down Scheme, which seem to incur some hefty fees, when I can achieve the same result from an annual UFPLS without any fees? Also, by leaving the bulk remainder invested in the pension pot I'm (admittedly, with risk attached) hopefully achieving a greater return than any ISA? I feel I must be missing something?
  • bigadaj
    bigadaj Posts: 11,531
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    Shylock wrote: »
    James, thanks for taking time to reply. TBH I'm failing to see the attractiveness of swapping it to a Draw Down Scheme, which seem to incur some hefty fees, when I can achieve the same result from an annual UFPLS without any fees? Also, by leaving the bulk remainder invested in the pension pot I'm (admittedly, with risk attached) hopefully achieving a greater return than any ISA? I feel I must be missing something?

    Fees will vary from one provider to another, yours might be cheaper with ufpls whereas others will be with drawdown, depending on the quantum then a transfer and change of approach may be worthwhile.

    Returns within an isa and pension will be the same if they are invested in the same things, if not they won't. The options available are pretty similar or identical now so it's personal choice.
  • dunstonh
    dunstonh Posts: 116,031
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    BH I'm failing to see the attractiveness of swapping it to a Draw Down Scheme, which seem to incur some hefty fees

    Fees vary but there are a number of providers that charge no more for the decumulation stage than they charge for the accumulation stage. Where there is a charge, you tend to find it is low (often because their annual charge is low).
    when I can achieve the same result from an annual UFPLS without any fees?

    Your pension will have fees. It may not have a fee specific to UFPLS but it will have charges. For example, the annual management charge. Yours could be 1% p.a. whereas a drawdown personal pension could be 0.40% p.a. with a one off drawdown charge of £184.
    Also, by leaving the bulk remainder invested in the pension pot I'm (admittedly, with risk attached) hopefully achieving a greater return than any ISA?

    ISAs and pensions have the same investment options and can be the same charges. So, returns would be the same in that case. Some pensions can be cheaper than ISAs though.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • jamesd
    jamesd Posts: 26,103
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    Shylock wrote: »
    I'm failing to see the attractiveness of swapping it to a Draw Down Scheme, which seem to incur some hefty fees, when I can achieve the same result from an annual UFPLS without any fees?
    Just means that the place you're with no has chosen to price one higher than the other. The largest direct to consumer place - Hargreaves Lansdown - has no extra fees at all for drawdown.
    Shylock wrote: »
    Also, by leaving the bulk remainder invested in the pension pot I'm (admittedly, with risk attached) hopefully achieving a greater return than any ISA? I feel I must be missing something?
    Maybe you were thinking "cash ISA" when I just wrote "ISA" which includes stocks and shares and Innovative finance (P2P lending) ISAs? S&S ISA can hold most things that a pension can hold. The IF ISA can hold things that today are normally too costly to hold in a pension for most people but most of the IF ISA attractive deals aren't available yet due to the time the FCA is taking to get the firms approved.

    So it's not that moving out of the pension has to change how you invest the money, it's just a shift of tax wrapper around the money, potentially with identical investments. Though the IF ISA is particularly interesting once more providers are able to offer it, since it offers lots of really interesting diversification away from equities and corporate or government bonds.
  • Shylock
    Shylock Posts: 53
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    jamesd wrote: »
    Maybe you were thinking "cash ISA" when I just wrote "ISA" which includes stocks and shares and Innovative finance (P2P lending) ISAs? S&S ISA can hold most things that a pension can hold. The IF ISA can hold things that today are normally too costly to hold in a pension for most people but most of the IF ISA attractive deals aren't available yet due to the time the FCA is taking to get the firms approved.

    Yes, I made the error of thinking only in terms of Cash ISA but I now understand your point about a S&S ISA. Thanks.
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