How much can I draw down?

Chickereeeee

Just checking: I have done my own calculations, but how much more could I actually draw down under flexible rather than capped drawdown, before I hit the 40% tax rate?

Currently (age 57), I can take 5.52% of a pot of £400K, which is £22,080pa

I need to have £20K per annum from somewhere before I can move to flexible drawdown, so that would mean I would have an income of £44,080 before I took any advantage of the 'flexibility'.

That's getting close to the 40% tax band is it not?

GhIFA

Firstly, do you have any other pension income? State pension won't have started for you yet, so any other annuities, or occupational pensions in payment?

Chickereeeee

Doesn't matter does it? Assume I have the £20K income covered somehow: e.g. annuity/final salary pension. After SRA by state pension/annuity/FSP.

As far as I can see, I would always be in the 40% tax rate if I go flexible drawdown?

GhIFA

Chickereeeee wrote: »

Doesn't matter does it? Assume I have the £20K income covered somehow: e.g. annuity/final salary pension. After SRA by state pension/annuity/FSP.

As far as I can see, I would always be in the 40% tax rate if I go flexible drawdown?

Apologies, I've just re-read your original post and realised I had mis-interpreted what you were asking.

£44,080 would be above the Higher Rate tax threshold. Only point I would make though is that you are basing the drawdown figures on the full fund, and not accounting for the tax free cash you could take.

This would mean you would be drawing income on £300,000 of the fund which would give £16,560.

Chickereeeee

No, that is after the 25% tax free lump sum.

Thanks, you confirmed my surmise: the 'generosity' of flexible drawdown comes with baggage of the higher tax rate, whichever way I cut it.

kidmugsy

GhIFA wrote: »

Apologies, I've just re-read your original post and realised I had mis-interpreted what you were asking.

Well done you; I still have no idea what she's asking.

mania112

From 6th April 2013 to 5th April 2014 40% tax starts at £41,451 (£32,011 + £9,440).

Hope this helps?

Chickereeeee

kidmugsy wrote: »

Well done you; I still have no idea what she's asking.

Simply, it seems that if I arrange things so that I can have flexible drawdown, I will also be in 40% tax band. I was checking if that were so (and if there was any way to avoid it!).

grey_gym_sock

well, if you reached the £20k by using part of this pension fund to buy an annuity, then you could use flexible drawdown on the rest of it without reaching 40% tax.

that is unlikely to be a good idea if you so far have 0 out of £20k fixed income, as it would involve using most of this pension to buy an annuity. but it can be a good option if you are already close to £20k.

Imastu

Am also interested in the flexible drawdown scenario, linked to retiring early. The main objective being to maximise the cash taken out of the pot and into a bank account (and give away eventually to minimise inheritance tax), rather than maximise income over a long term, while minimising tax.

Using the scenario above, with a £600k pot and (for this purpose) no other income, if I retired before state pension age, would a scenario like this work?

Take maximum income drawdown until state pension age (around 4-5%, so around £24k-£30k. Say pot at state pension age is still £600k (investments grow to match cash taken out). At state pension age, convert whatever is needed to reach £20,000 annual income AFTER state pension into an annuity. Total of state pension plus annuity to equal £20,000.

Balance of SIPP would then be available for flexible drawdown. The balance is not knowable yet, as the new state pension will have kicked in, but I'm thinking something like £8,000 a year, so £12,000 annuity required, which (age 67) would cost something like £200,000 for a non-inflated annuity. Remaining pot would therefore be around £400,000.

Does that make sense? Are there any restrictions at that point on how much can be taken flexibly? The whole lot in one go?

TIA for any advice

grey_gym_sock

i think that makes sense.

(you didn't mention taking the 25% tax-free lump sum, but presumably that's the plan anyway.)

you can take the lot in 1 go, but it can push you into higher income tax rates in the current tax year. some ppl might take enough so that they don't quite hit higher rate tax. others will have too big a pension pot for that to work. but might keep their income under £150k, to avoid additional rate tax. or under £100k, to avoid losing the personal allowance. or under £50k, to avoid losing child benefit