Capped Income drawdown savvy

SallyG

If you can take cash out of capped income drawdown is it financially astute to do it/daft not to - even if you don't need the income to live on just yet ?
I can for now withdraw 120% of GAD each "pension year" - the "balanced solution" fund I'm in is rocking gently on its fulcrum - up a bit then back down a bit - should pension cash be withdrawn at every opportunity?

jamesd

It's not always right but it is often a good idea to take the maximum possible amount of drawdown income as early as possible and reinvest it in investments within a stocks and shares ISA. That way the money keeps on growing just as it would if it was still in the pension but a lump sum pot is gradually accumulating that you can draw on at a higher rate than you could if it was within the pension.

If you don't have available S&S ISA allowance to use you'd need to work out the capital gains tax exposure and whether you might actually end up paying extra tax or not. Often not for modest amounts of capital but those with larger pots and income levels being taken could pay some CGT. Whether it's worth paying this for access to the capital depends on the individual person.

Gains:

1. Accumulates a capital pot you can draw on at any required rate in the future.
2. Lifetime allowance percentage used is calculated on a lower amount of money so there's less chance of exceeding it.
3. Have the option to use the money to make more pension contributions to get a second lot of tax relief.

Losses:

1. Death payments paid somewhere other than into a pension are taxable, so life assurance might be needed to cover the tax cost for some beneficiaries.
2. Capital vulnerable to bankruptcy and other legal judgments. May exceed means tested benefit savings allowances.
3. Possibility of CGT if the S&S ISA allowance is exceeded and some has to be kept outside a tax wrapper.

For those who are working the idea of taking the income and paying it into another pension can be a nice tax dodge to increase the amount of money in a pension producing income, at the cost of some reduction in capital outside the pensions.

I will be taking income drawdown at the earliest permitted date, regardless of whether I need the income or not.

vbm

Do you need the income
What is your tax position
Are death benefits important / IHT position if signification funds are removed from the wrapper
Have you considered recycling the income for additional TFC and death benefits
Do have have plans to purchase an annuity, is preservation of the fund important.

Also the max GAD is now 100%, not 120%

gadgetmind

My (part formed) plan is to draw as much as I can without paying 40% tax. Anything we don't spend will go into ISAs or dividend income generating assets in my wife's name. We'll also continue to do a £240pcm pension for my wife as she should be able to remain a non tax payer until 66 and will then only just put her toes into 20%.

kidmugsy

Do you think that the standard rate of income tax is guaranteed not to rise over the next quarter century? Neither do I.

gadgetmind

I know what you mean regards income tax. I'm working on the current rates, with bands increasing in line with CPI. Of course, in practice, the bands and rates fly all over the place, but how do you model that?

jamesd

Hard to model but you can protect by blending pension and ISA income. Protection against future tax rate increases is one of the reasons it's interesting to take income at current tax rates and move the money into the ISA wrapper.

gadgetmind

I can't recall when we last failed to max-out our ISAs or use our full CGT allowances, and I'm sure we'll continue to do this for many years into retirement. Similarly I recognise that the only advantage to a pension is its tax position, so I'll be putting as much money that would otherwise be heavily taxed into a pension as possible, and I'll be moving it out at as low a tax rate as possible. If the stress on tax efficiency means that my pension outlives me, so be it.

SallyG

Thanks to all for your thoughts - I opted into drawdown directly with the provider last March when it was still possible to secure the 120% GAD rate - kind of absent-mindedly hoping that extra 20% at least takes care of any income tax for a while anyway and on the cusp of the tax year I stuffed as much tax free cash as poss into cash ISAs and then in the NS&I index-linked certs but the rest of the pension pot is now "invested" / thrown over a cliff in a bottle.
What are the mechanics of taking max income from a drawdown pension?
Do I just ring the provider, ask for the max as a lump sum - do they automatically deduct 20% tax from my payment?
Does drawing down income trigger a review by the provider - if so what happens in a review?

I understand that taking income marks the start/year 1 of the drawdown - [no relation to the tax year?] - if I take income now in year 1 and don't take income in year 2 and 3 [ it might be growing by then?] can I then take 2 lots of income in year 4?

Iancfp

Yes if you ask provider they will comence drawdown (they will need form) and deduct tax at source.

They will not review income until you reach 5 year anniversay (after that 3 yearly) the date is the date you took your lump sum - this is when you started drawdown its just your current drawdown rate is zero.

Why not go to an IFA for advice on this? Going direct to provider usually means they just pocket the monies that would go to the adviser to pay for advice but refuse to advise you

gadgetmind

Iancfp wrote: »

Yes if you ask provider they will comence drawdown (they will need form) and deduct tax at source.

Do you then need to do a tax return to (belatedly!) get your personal allowance?