Questions on 25% Tax Free Withdrawal

deepam · 12 March 2017 at 11:21AM

Hi,

I have few questions on pensions.

1. I understand that 25% of my pension pot is available tax free at the age of 55. Just to explain my question with an example. Imagine I have £2000 in my pension at 55. I withdraw 25% which is 500 but I keep working till I am 65 and my pension pot grows by another £1000. Now my pension pot becomes £2500 (£1500 left after withdrawal at 55 + £1000). Do I get another £250 tax free? Basically how is 25% calculated

2. As I understand that after 25% withdrawal the rest of the amount is taxable when I take the money out. So If I don't have any income at the age of 60, can I withdraw the entire 75% of my pension tax free?

3. What happens if I plan to quit this country and go and live in Australia for rest of my life at the age of 50? Do they give my money in that case?

4. I am a 40% tax payer at the moment. What ever salary I sacrifice, do I have to get my tax relief from the HMRC or does the money go automatically into my pension account?

5. Are these pension rules fixed? I mean what if the government changes rules next year and says that from now on only 10% withdrawal is tax free? Can gov do that?

Please can I have some advice on my queries above? Much appreciated. Thanks in advance...

dunstonh · 12 March 2017 at 12:44PM

1. I understand that 25% of my pension pot is available tax free at the age of 55.

Just because it is, does not mean you should.

Imagine I have £2000 in my pension at 55. I withdraw 25% which is 500 but I keep working till I am 65 and my pension pot grows by another £1000. Now my pension pot becomes £2500 (£1500 left after withdrawal at 55 + £1000). Do I get another £250 tax free? Basically how is 25% calculated

No. you would have crystallised your fund at 55. You only get one bite of the cherry. Hence why taking the lump sum early can be a bad move. Indeed, that £2000 at 55 left to grow would likely be closer to £4000 by 65 (assuming no more contributions).

2. As I understand that after 25% withdrawal the rest of the amount is taxable when I take the money out. So If I don't have any income at the age of 60, can I withdraw the entire 75% of my pension tax free?

No. It depends on how the pension fund is. £2000 would be tax free as it is below your personal allowance. £20,000 would be above your personal allowance and there would be tax.

3. What happens if I plan to quit this country and go and live in Australia for rest of my life at the age of 50? Do they give my money in that case?

You will be subject to taxation rules in the country of residence. Certain countries have agreements that allow a pension to be transferred.

4. I am a 40% tax payer at the moment. What ever salary I sacrifice, do I have to get my tax relief from the HMRC or does the money go automatically into my pension account?

it is handled via PAYE.

5. Are these pension rules fixed? I mean what if the government changes rules next year and says that from now on only 10% withdrawal is tax free? Can gov do that?

The Govt can do what it likes. Certain groups have been predicting the end of the tax free cash availability since personal pensions were introduced in 1988. 30 years on and its still here. Indeed, all legislation changes since then have increased the amounts payable. i.e. S226 RACs were changed to give 25% in 2006. Protected rights had no tax free cash entitlement at all but in 2006 they gained 25% entitlement.

Tax free cash is the smallest of all the costs to the treasury in respect of pensions. It also benefits the economy by allowing consumers to have lump sums to spend and allow those that have over extended on credit to clear it.

AnotherJoe · 12 March 2017 at 12:56PM

deepam wrote: »

Hi,

I have few questions on pensions.

2. As I understand that after 25% withdrawal the rest of the amount is taxable when I take the money out. So If I don't have any income at the age of 60, can I withdraw the entire 75% of my pension tax free?

Only if the amount you withdrew was below the personal limit which is think is about £11k currently. If you had £100k and took it all out in one go you'd pay tax at higher rates. Hence best to take it out in stages.

3. What happens if I plan to quit this country and go and live in Australia for rest of my life at the age of 50? Do they give my money in that case?

No. Otherwise the financially inept would empty their pensions by nipping off on a couple of weeks vacation. There are ways of doing this by moving into other pension jurisdictions which then allow you to take the money earlier. I believe Portugal is one for example i think you can take it at 50.

4. I am a 40% tax payer at the moment. What ever salary I sacrifice, do I have to get my tax relief from the HMRC or does the money go automatically into my pension account?

Both. Lets say you put £800 in. The government will (via your pension provider) add in £200. When you complete your self assessment form you'll say you added £1000 (you put in the figure including the government addition) and they will give you back (it wont go into your pension) another £200. So to get £1000 in your pension cost you only £600. Which is why as a higher tax rate payer you should put in as much as you can
EDIT: Missed it was salary sacrifce, my example is related to top ups outside of yuor employers pension.

5. Are these pension rules fixed? I mean what if the government changes rules next year and says that from now on only 10% withdrawal is tax free? Can gov do that?

They can do whatever they want (and can get through parliament)

Please can I have some advice on my queries above? Much appreciated. Thanks in advance...

Wasnt sure about your point 1, also it depends if in your example you carried on adding money or not.

deepam · 12 March 2017 at 3:20PM

Thanks very much for taking out time to answer my queries.

Questions on 25% Tax Free Withdrawal

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