Pension help

Lecca

Hi newbie here , i am wanting to take a lump sum from my pension, as i understand it the law , i can take 25% from my pension pot tax free and any thing over the 25%i pay tax on it , now my provider has sent me some figures out and they say the 25%tax free lump is the first25% of the figure i am withdrawing not 25% of my total pot ,have looked on line and find it a bit confusing anyone can offer any help ?

[Deleted User]

Assume that:
This year you take out £1000 - £250 will be tax free
Next year you take out £1000 - £250 will be tax free
etc.

If you withdraw the total pot, then 25% of the total should still be tax free, the rest taxable - but depending on the amount taken could push you into a higher tax bracket.

molerat

There are 2 ways of approaching this. You either take 25% of the whole pot tax free at the start and the rest is subject to tax whenever you dip into it or you take 25% of each dip tax free. There are pros and cons of each method depending on your tax situation.

Lecca

sorry guys i may have mis led , say my pot is £40000 and i want to take £23000 from it , i assumed that i would be able to take £10000 tax free and pay tax on the remainder, but in fact they telling me that my tax free amount is only £5750 (25%of £23000)ie the sum i withdraw not the total pot fund

mark1959

Lecca wrote: »

sorry guys i may have mis led , say my pot is £40000 and i want to take £23000 from it , i assumed that i would be able to take £10000 tax free and pay tax on the remainder, but in fact they telling me that my tax free amount is only £5750 (25%of £23000)ie the sum i withdraw not the total pot fund

So what part of that don't you understand?

[Deleted User]

Lecca wrote: »

sorry guys i may have mis led , say my pot is £40000 and i want to take £23000 from it , i assumed that i would be able to take £10000 tax free and pay tax on the remainder, but in fact they telling me that my tax free amount is only £5750 (25%of £23000)ie the sum i withdraw not the total pot fund

That's correct, and when you take the remaining £17000, 25% of that (£4250) will be tax free as well.

Paul_Herring

Lecca wrote: »

sorry guys i may have mis led , say my pot is £40000 and i want to take £23000 from it , i assumed that i would be able to take £10000 tax free and pay tax on the remainder, but in fact they telling me that my tax free amount is only £5750 (25%of £23000)ie the sum i withdraw not the total pot fund

To rephrase what's already been said, if you want £23,000 out, you can either

- withdraw £10,000 tax free, and then a further £13,000 upon which you will pay income tax at your marginal rate (with tax at marginal rate on all future withdrawals with no more tax-free) or
- withdraw £23,000 with 25% of that (£5,750) tax free with the rest taxed (and all future withdrawals treated in exactly the same way - 25% tax free, 75% taxed.)

It would appear only the second option has been presented to you.

Which may be the only possibility with whereever your fund is.

coyrls

Lecca wrote: »

sorry guys i may have mis led , say my pot is £40000 and i want to take £23000 from it , i assumed that i would be able to take £10000 tax free and pay tax on the remainder, but in fact they telling me that my tax free amount is only £5750 (25%of £23000)ie the sum i withdraw not the total pot fund

They are only giving you the option called UFPLS, which works as they describe, however it is also possible to do what you want by crystallising the entire fund, taking the full 25% tax free lump sum together with an additional £13,000 that will be taxed. It may be that your pension provider only offers the UFPLS option, in which case you will first need to transfer the pension to a provider that will offer the second option before making your withdrawal.

dunstonh

Lecca wrote: »

sorry guys i may have mis led , say my pot is £40000 and i want to take £23000 from it , i assumed that i would be able to take £10000 tax free and pay tax on the remainder, but in fact they telling me that my tax free amount is only £5750 (25%of £23000)ie the sum i withdraw not the total pot fund

There are multiple ways of drawing money from a pension.

The UFPLS (Uncrystallised funds pension lump sum) requires you to draw the money evenly. e..g if you draw £23k from your £40k pot then 25% of the £23k would be tax free with the 75% taxable.

If you wish to draw the £23k using the full 25% in one go and the rest taxable then you would need to put the pension into drawdown. Your existing provider may not offer this option (most old plans do not). You would need to transfer the pension to a modern plan that offers drawdown.