25% tax free withdrawals

Gavsur

Apologies if this seems obvious or has been raised before.
Being over 55 and under the new pension reforms I am able to withdraw 25% of my pension pot tax free. My question is, I have a total of 3 pension pots with approx £170,000, £30,000 and £16,000 invested. Can I draw 25% from all three pots or must I consolidate the 3 pots into one so I can draw the 25%.

atush

You can do either.

Take them separately, in different years or not, or transfer them into one pot.

SnowMan

You can treat the 3 pots completely separately if you like.

So for example you could just leave the £30,000 and £16,000 pots untouched and just take money from your £170,000 pot.

In that example then there are two ways to take money from your £170,000 pot. Lets say you want to take a lump sum of £60,000.

1. You can use UFPLS (uncrystallised funds pension lump sum) to take a lump sum out of the pot say, £60,000. This means that 25% of your £60,000 is tax free (£15,000) and the balance of £45,000 is added to your income and taxed accordingly in the tax year it is paid, so you will end up paying higher rate tax on at least some of that £45,000 income. Obviously you will receive less than £60,000 because of the tax permanently deducted. Furthermore you will probably initially be further overcharged tax at source, on top of the tax permanently deducted, and have to claim some of that overcharged tax back using a P50Z, P53Z or P55.

2. You can put the £170,000 into flexi-access drawdown. You can get 25% of the fund tax free (£42,500). The remaining fund of £127,500 (= 170,000 - 42,500) is placed into drawdown and any income you take from that either now or later is all added to your income in the year it is paid and taxed (as you have already used up all your 25% tax free element). So you could take another £17,500 from the drawdown pot (= 60,000 - 42,500) to get you up to £60,000 although you will pay some tax on that.

In minimising the tax you pay on taking the money out, the key if you are say normally a basic rate taxpayer is to avoid un-necessarily pushing yourself into higher rate tax in a year by taking money out, and making sure you make full use of your personal allowance every year.

As well as doing different things with your different 3 pots you can also effectively split up your individual pots. So you could put £100,000 of your £170,000 into flexi-access drawdown, take 25% cash (£25,000) leaving £75,000 in the drawdown pot (no further tax free cash available from this) and £70,000 of pension pot not yet taken (with 25% of this still available tax free later).

It is possible even likely that some of your providers won't offer the pension flexibility options. In that case you may need to transfer the pot to a provider that does to access flexibility (no need to transfer to one of your other pots although that is an option). If you are doing that watch out for exit charges and loss of any guaranteed annuity rates, or special features.


You may want to arrange a Pension wise appointment as they can guide you on all your options, which will include buying an annuity as well as taking money flexibly.

https://www.pensionwise.gov.uk/appointments

dunstonh

Can I draw 25% from all three pots or must I consolidate the 3 pots into one so I can draw the 25%.

Whilst the rules allow you to draw 25% PCLS, the transaction you want to do would require the pension to be crystallised and placed into income drawdown. This feature is possible on many modern individual plans but it not typically available on legacy (old) plans, workplace plans or stakeholder pensions. So, you may be required to transfer some or all of the pensions to one that does allow it.

Being over 55 and under the new pension reforms I am able to withdraw 25% of my pension pot tax free.

There is nothing in the reforms that have changed the rules on this front. Remember that just because you can take a lump sum, does not mean it is the right thing to do.

kidmugsy

Gavsur wrote: »

Apologies if this seems obvious or has been raised before.
Being over 55 and under the new pension reforms I am able to withdraw 25% of my pension pot tax free.

What do you plan to do with the 25%?

Gavsur

The idea is to invest in an additional buy to let property. I don't anticipate retiring for around another 10 years but the monthly rental income and expected capital appreciation would seem to make sense!

kidmugsy

Gavsur wrote: »

The idea is to invest in an additional buy to let property. I don't anticipate retiring for around another 10 years but the monthly rental income and expected capital appreciation would seem to make sense!

Fair enough. Not to my taste, but so what? You'll still have the 75% invested in financial assets.

dunstonh

Gavsur wrote: »

The idea is to invest in an additional buy to let property. I don't anticipate retiring for around another 10 years but the monthly rental income and expected capital appreciation would seem to make sense!

Possible but the BTL will be subject to income tax, capital gains tax and inheritance tax *unlike the pension). So, the BTL will have to cover those as well as beat the investments you have within the pension. That is where it gets harder.

Gavsur

Fair comments, Throughout my working career I have often wondered why I ever sold any property I had previously brought but reality sets in - I needed the money to purchase a larger property. I'm now on the other side of the hill wondering why I need such a large house when the kids are no longer at home. I have been involved in a property career for many years and all to often I see folk easing into retirement with a few rental properties under their belt which goes a long way towards an enjoyable retirement. Sure, no one should look at investing in property for short term gains but a 10 to 15 year horizon should look a lot more attractive.

kidmugsy

Gavsur wrote: »

Fair comments, Throughout my working career I have often wondered why I ever sold any property I had previously brought but reality sets in - I needed the money to purchase a larger property. I'm now on the other side of the hill wondering why I need such a large house when the kids are no longer at home. I have been involved in a property career for many years and all to often I see folk easing into retirement with a few rental properties under their belt which goes a long way towards an enjoyable retirement. Sure, no one should look at investing in property for short term gains but a 10 to 15 year horizon should look a lot more attractive.

Holding property unto death is the obvious way to avoid CGT.:(