Tax clarification needed on drawdown please

cannyshopper_2

Please can someone clarify the position on income tax payable on drawdown from a pension pot.

I'm getting totally confused trying to sort it out!

OK, so I understand that 25% of the pension pot is tax-free when taken as income. Does this apply to the actual amount taken out at any one time?

say for example I have a pot of £100K. If I take out £25K immediately, do I get all of that tax free. (All future drawdowns are then taxable.) This is what most info sites are suggesting.

Or do I only get 25% of that £25K tax free (ie I get £6250 tax free)
and therefore would also pay tax on 75% of all other drawdowns.

Sounds simple put in those terms but the wording says "25% is tax free" without explaining exactly how it works.

sandsy

£25k can be taken tax free.
The rest can be drawn down as and when you like and will be added to any other taxable income in the tax year.
So this year, if you took £10600 from the remainder and had no other income, the £10600 would all be tax free as it falls within your personal tax free allowance.

cannyshopper_2

so what happens if I don't take the initial £25K, but decide to take £10K a year for the next few years?

dunstonh

There are different types of drawdown.

Simple income drawdown means taking your 25% tax free immediately and then drawing the rest as income (which is taxable income).
Phased drawdown is where you take a proportion of your pension each year and the first 25% is tax free and the other 75% is taxable.

Neither of these are new options and have been around for nearly a decade. Albeit with a cap on how much you could take. Which no longer exists.

so what happens if I don't take the initial £25K, but decide to take £10K a year for the next few years?

You would likely utilise phased drawdown to to that. It is possible to make the mistake of crystallising the whole pension and requesting 0% TFC but that would be an error. A costly error but it is possible if you get the forms wrong.

cannyshopper_2

Am I going to have to start self-assessment for income tax?
Currently have no taxable income.

zagfles

cannyshopper wrote: »

Am I going to have to start self-assessment for income tax?
Currently have no taxable income.

Shouldn't do unless the taxed part is very large (eg £50k+). Most (all?) pension providers will pay using PAYE.

There's another option for "drawdown" called ufpls (google it for full explanation) where you take a lump sum out of the pension without crystallising, and you get 25% tax free and 75% of it taxed.

So basically 3 options

1) Full drawdown - take 25% of the whole pot tax free, rest is "crystallised" and can be taken whenever you want and is taxed, usually by PAYE.

2) Phased drawdown - do the above but with just part of the pot, leaving the other part uncrystallised. Eg on £100k pot split into 2 pots of £50k, take £12.5k tax free leaving £37.5k crystallised and available for taxed drawdown, and £50k left uncrystallised.

3) UFPLS - similar to phased drawdown, except you take the entire taxed part out at the same time, paying tax on 75%

kangoora

What you can do, if no other income, is take £10,600 as income PLUS 25% tax-free per year for a total of £14,133 per year. (£14,133 x 75% = £10.6k.) and not pay any tax.

The tax free 25% is, obviously, tax free and the taxable proportion of £10.6k is under the personal allowance so you won't pay tax on that either.

This only works if you have no other income at all.

xylophone

When you say that you have no taxable income, do you mean that you do have earnings but not enough to pay tax, or that you have only savings income which is below the taxable limit or that you have no income at all or......

Freecall

kangoora wrote: »

This only works if you have no other income at all.

When planning for income in retirement, this statement needs qualifying a bit. While it is true that any additional pension or earned income beyond the personal allowance will be taxed at your marginal rate, it will still be possible to have other income without additional tax being payable.

The most obvious two sources of such income derive from savings and (from 2016-17) dividends.

In the July Budget, GO announced that the 10% deduction will be abolished. Instead, investors will receive a £5,000 allowance, meaning the first £5,000 of dividend income will be tax free.

Maybe not life-changing but all part of the mix.

hyperhypo

I hope the OP doesn't mind me adding another variable to the "no other income at all" point ......

I wonder how income tax applies if in a situation of a combined DB / DC pension...e.g like this.

In one year receiving £15000 p.a gross from DB pension.

And having a DC pot of e.g £100, 000 and wishing to flexi access drawdown a chunk of £5000 p.a. ie to preserve some capital in DC pot.

I'm thinking that all of annual allowance is accounted for in the DB pension (ie above 10,600), but question is one still entitled to the 25% Tax Free Cash from the crystallised £25k, and paying tax on the remaining 75% as with DB income.

Is there anything else one needs to think about having income from DB and DC streams, mindful of tax situation.

And in my variant example no other income from dividends or other sources and pre SP age.

Thank You

Katykay1

First time on forum so don't know if going about this the right way! But need to know how you go about getting your 25%