Tax on Pension Withdrawal

scaredofdebt

How does tax work if you tax your pension as a lump sum?

I beleive you can take a lump sum of 25% tax free, is this still the case?

For example, if you had £200k at age 55, how much is the maximum you could withdraw net?

dunstonh

I beleive you can take a lump sum of 25% tax free, is this still the case?

If you have not previously crystallised your pension, then yes, 25% tax free is an option on money purchase schemes (caveats apply).

How does tax work if you tax your pension as a lump sum?

Depends on how you do it. Is it an ad-hoc payment, a full withdrawal or an ad-hoc in addition to a monthly. Is it part of a phased drawdown or one off. Some pension providers are not yet in a position to do it other than month one earnings when its ad-hoc.

For example, if you had £200k at age 55, how much is the maximum you could withdraw net?

100% gross but we cant tell the net figure without knowing what other income there is. Hopefully, no-one in their right mind would be drawing £200k from a pension like that.

xylophone

http://adviser.royallondon.com/technical-central/pensions/benefit-options/emergency-tax-and-lump-sum-withdrawals/

Bravepants

Sorry, don't want to hijack the thread, but I have a related question...

I will be able to take my AVC pot from age 55. I will likely transfer to a SIPP before that date, but anyway...

My plan would be to take £15333 each new tax year in April of each retirement year, so that's £11500/0.75 (assuming allowances will be the same at the time).

I would also take out 3 or 4% from my ISA per year.

I would put the annual total drawdown into a bank account and draw out an amount towards our monthly expenses from that each month.

I plan to do this until I reach 60, at which point a DB pension kicks in and I will then start taking 3 or 4% per annum from my AVC (or SIPP), in addition to my ISA.

Does this sound sensible?

Are there any implications to taking the £15333 every April? Will I be charged tax and then have to claim it back during the year?

Dazed_and_confused

Are there any implications to taking the £15333 every April? Will I be charged tax and then have to claim it back during the year?

No, after the first year the tax should be fine providing you mean 1, 2, 3, 4 or 5 April

If you mean 6 April or later then it all depends (after the first time you do it) on whether your pension company will treat it as an annual payment rather than a weekly or monthly one. If they will then the HMRC guidance for annual payments states

When working out PAYE using Tax Tables A, if you’re using a code on a cumulative basis, use the table for month 12

So would be no need to claim anything back if your taxable pension payment was less than the tax free amount allowed by your tax code i.e.
1150L = 11509

Bravepants

The first year might be more complicated because I wouldn't be retiring until my birthday, which is at the end of May. So the following 1st April (say) I would have to take into account my income from the previous 6th April to end of May.

scaredofdebt

I'm just weighing up my options.

I intend to hopefully retire at 55, I have 8 years to go.

I expect my pension to be worth around £200k depending on stock market conditions.

I can either continue working, or start my own business, for which I need capital, hence the possibility of taking this from the pension.

I have been told if I went down the annuity route at 55 I would only get one for around £4k per annum, not enough to live on, I need more like £15k

So the question is how much cash can I access for the business(es).

One of the businesses I am looking at would only need around £30-50k start up cash so I can possibly do that with the tax-free lump sum, but I may look to diversify with 2 businesses (the ones I am looking at are not time consuming so it is feasible).

Hence the question about tax on anything other than the cash free lump sum.

I assume if you took ~£50k tax free the rest of it would be taxed at 45%, obviously thresholds and rates may change.

Bravepants

You would take the £50k tax free lump sum in the first year.

In order to avoid paying tax on the remainder you would take out nothing more than your annual allowance (currently £11500) each financial year after that. Assuming you had no other taxable income of course!

As Dunstonh says, don't take it all out at once!

Bravepants

The further issue though is how long you want your pension to last, while it remains invested. The normal rule is 4% drawdown per annum, some people suggest 3% is safer. Note that even 3% per year from your remaining £150k pot (after 25% tax free lump) is £4.5k and higher than the £4k annuity rate you were quoted for your full £200k! At a 4% drawdown rate you get £6k per year to supplement the income from your business(es).