MSE Guide to Taking Your Pension 2015

Bumblies

I've just read the newly available Pensions Guide mentioned in this week's newsletter. It's pretty thorough and easy to understand but part of it is at odds with what I was told at a recent pensions presentation given by Standard Life.
On page 13 (and elsewhere in the Guide) it states that when taking cash lump sums, 25% of each sum is tax free and 75% taxed. This is what I had always understood to be the case.
However, at the Standard Life presentation they stated that the first 25% of the entire pension pot was paid tax free before any tax was paid. Taking an example of a £100,000 pot and payments of £10,000 a year, they said in year 1 you would get £10,000 tax free, in year 2 you would get £10,000 tax free, in year 3 you would get £5,000 tax free (making up 25% of £100,000) and £5,000 taxed, in year 4 onwards you would get £10,000 fully taxed.
Because this was at odds with what I understood I challenged one of the speakers during a break. They explained it by a rough sketch showing £100,000 on one side of a line and moving "slices" across the line annually as withdrawals were paid. I remember likening it to a life insurance bond where 5% can be withdrawn annually without incurring tax. It may be a peculiarity of the way life insurance companies set up pensions plans as multiple policies but I would be interested to the definitive position on this.

atush

Those are the two different ways to take your pension. It is called crystallization.

when you take the whole 25% tfls, that is complete crystallization, and when you take each tranche 25% TF and 75% taxed as income this is partial crystallization.

As to which is better for you will depend on lots of things we dont know (such as your other income and if you still want to make pension contribs)

Paul_Herring

Bumblies wrote: »

I've just read the newly available Pensions Guide mentioned in this week's newsletter. It's pretty thorough and easy to understand but part of it is at odds with what I was told at a recent pensions presentation given by Standard Life.
On page 13 (and elsewhere in the Guide) it states that when taking cash lump sums, 25% of each sum is tax free and 75% taxed. This is what I had always understood to be the case.

Method 1:
Crystalise the whole £100,000 at once, get £25,000 TFLS, and the rest gets taxed as you withdraw it.

However, at the Standard Life presentation they stated that the first 25% of the entire pension pot was paid tax free before any tax was paid. Taking an example of a £100,000 pot and payments of £10,000 a year, they said in year 1 you would get £10,000 tax free,

Method 2:
Crystalise £40,000, £10,000 of that is TFLS, the remaining £30,000 remains in fund as crystalised, leaving £60,000 uncrystalised.

in year 2 you would get £10,000 tax free,

Crystalise a further £40,000, £10,000 TFLS, £60,000 (£30,000 plus last-year's £30,000) remains in fund as crystalised, leaving £20,000 uncrystalised.

in year 3 you would get £5,000 tax free (making up 25% of £100,000) and £5,000 taxed,

Crystalise the final £20,000, 25% of which is £5,000. The remaining £15,000 joins the previous years' crystalised funds making a total of £75,000

If you want £10,000 this year you're going to have to start withdrawing from the crystalised funds (the £75,000) which needs to be taxed. So £5,000 off that £75K leaving £70,000.

in year 4 onwards you would get £10,000 fully taxed.

From that £70,000

dunstonh

Both options have been around for the last decade. One was called drawdown and the other was called phased drawdown.

So, you can phase the crystallisation of the pension over multiple years or you do it all in one go.

Deb_G

Hi, Ive also just read the guide and feel the guidance upon future contributions to pensions is not accurate. It states up to 10K per annum is the limit once in drawdown. However, the HMRC website clarifies that this is if for DCS when you take money as and when, if you buy an annuity or in a DBS the amount is the new limit of 40k (although states reduced to 30K) Although the guide is for people taking advantage of the new rules it would be good to pint this out as some people have many different pots. I know you mentionnot many people are in this situation, however you will be surprised howmany people will continue to work and access many different pension pots .., .