getting my pension

billozz

hi all,
i have asked a few questions about my pension but not this one i dont think, whats the best way to draw down my pension from a tax point of view, i undeerstand after april i can take the lot (£20000) im a basic rate taxpayer if that makes a difference
thanks
Bill

kidmugsy

billozz wrote: »

hi all,
i have asked a few questions about my pension but not this one i dont think, whats the best way to draw down my pension from a tax point of view, i undeerstand after april i can take the lot (£20000) im a basic rate taxpayer if that makes a difference
thanks
Bill

The idea would be to take the tax-free lump sum (£5k), and then take a portion of the tax-exposed amount (£15k), but not so much that you end up paying 40% tax on it. The 40% tax band begins at £42,466 in '15-'16.

If you can get it all out without paying 40% tax, then that's probably the cheapest way to do it. Otherwise leave a bit behind to withdraw in '16-'17 or later. Be sure to check that you wouldn't end up paying more in charges than you'd save in tax.

What are your plans for the money?

billozz

thanks for the reply, is the tax fre amount a "one off" or can i use it again in the next tax year? sorry if thats a stupid question

kidmugsy

billozz wrote: »

thanks for the reply, is the tax fre amount a "one off" or can i use it again in the next tax year? sorry if thats a stupid question

It's a one-off. Plus: I got my 40% threshold wrong. It will actually be £42,586.

PensionTech

thanks for the reply, is the tax fre amount a "one off" or can i use it again in the next tax year? sorry if thats a stupid question

Just to add a bit to this, although what kidmugsy said is correct.

Although you don't get to take the whole 25% tax-free amount one year and then become entitled to another tax-free amount from what's remaining in the next year, you can - if you choose - split up the tax-free amount by taking it in a number of lump sums. This is because there are two different ways to take benefits via the new flexibilities after April 2015:

1. Put the fund into "flexi-access drawdown" - you get the 25% tax free immediately, and you can then withdraw as much or as little of the remaining fund (which will be taxed as income) as you like.

2. Take one or more "uncrystallised funds pension lump sums" (UFPLS). Again, you take as much or as little as you want from your fund, but this time the 25% tax-free isn't paid first - instead, 25% of whatever you draw out is tax-free, with the remaining 75% taxed as income. You can then take another UFPLS (provided you've got any money left) and again 25% will be tax free and 75% taxed as income - and so on until the money runs out.

The difference between these two options may not seem immediately obvious so I'll just give you an example here.

Let's say you have a fund of £100,000. You want to take half, i.e. £50,000, now and then the other half in ten years' time. This is obviously not that realistic but does make for a nice simple example.

Flexi-access drawdown
You get your 25%, i.e. £25,000, as an up-front tax-free lump sum. The other £25,000 is taxed as income. The remaining £50,000 stays invested.

In ten years, let's say your remaining funds of £50,000 have done quite well, so they've doubled. This gives you £100,000 in your fund, on top of the cash you've already taken out. We've already said that you want to take that in the tenth year, so you have to take it as taxed income.

Overall: £25,000 paid tax-free; £125,000 taxed as income.

UFPLS
You take a UFPLS of £50,000 from the initial £100,000. 25% of that lump sum is tax-free - i.e. £12,500 - and the remaining £37,500 is taxed as income.

Again there is £50,000 left in the scheme that stays invested. Assuming the same fund growth, this has doubled in ten years' time, so your fund is again £100,000. As you want to take all of what's left in that tenth year, you take it as another UFPLS and get 25% tax-free - i.e. £25,000 - and the remaining £75,000 is taxed as income.

Overall: £37,500 tax-free; £112,500 taxed as income.


You can see that in some cases it may make sense for the tax-free amount to be spread out over a number of tax years, generally if you want to stagger withdrawal and are expecting the remaining fund value to grow substantially - but you have to balance this against things like legislative risk, e.g.. the risk that in scenario 2 (UFPLS), the rules have changed in ten years' time and they no longer allow 25% tax-free!

And no, you can't take a UFPLS from a fund that's already gone into drawdown in order to make the best of options 1 and 2 together - they've already thought of that.

atush

If you are still working/earning, Iw ould not take mroe than the 5K TFLS. I would wait until I actually retired to take the remaining 15K taking only enough to use up your PA.

That way is the most tax efficient way.

However, if this 20K is your only pension, it wont go far. So instead of even taking the 5K, i'd be adding to the pension.