Take or Leave it

Random47

Take it or leave it in - 25% tax free from the pot at retirement.
If one chooses to go drawdown pension what's the pro's cons's of each option?

dunstonh

It depends on what type of pension. The terms available and the method of payment. Along with your health and financial needs.

in the case of drawdown, I do far more cases where the 25% is not taken at the start but phased with each withdrawal (regular or ad-hoc).

kuratowski

What would you do with the 25%? If it's leave it lying around as cash in a bank account, do not take it. If it's pay off some expensive debts (e.g. credit cards), do take it. If you don't need the money at this time I would leave it in unless you have a concrete plan which returns more than leaving it in the pension.

vulcanrtb

If you only ever plan to withdraw from your pot below annual allowance (think it's somewhere around £11500 PA but someone will have a more accurate figure), then it's better to leave it in. But if you plan to withdraw much more than that per year, the tax you will pay will probably cancel out any percentage build.
FWIW, I plan to take out 25% of my pot on retirement at 55 and use the money to fund living comfortably for 5 years (until various DB pensions kick in at 60) and not have to worry about tax.

OldMusicGuy

It depends so much on personal circumstances that it's impossible to say. You need to do some pension planning to decide what works for you.

vulcanrtb wrote: »

If you only ever plan to withdraw from your pot below annual allowance (think it's somewhere around £11500 PA but someone will have a more accurate figure), then it's better to leave it in.

I've just retired 5.5 years before SP age. I have no income apart from interest on savings and that won't be over the £5,000 or so that would make it taxable (when added to taking the full personal allowance from my DC pot). So I will UFLPS each year until SP age up to my personal allowance. Unlike vulcanrtb, I have enough cash saved outside my DC pot to fund living costs until SP age. I'll then see what my situation is like when I start getting SP.

So not taking 25% works well for me but your situation may be different. I would also take 25% as a lump if it looks like being abolished. I think that's a possibility if there is a change of government.

kidmugsy

OldMusicGuy wrote: »

I would also take 25% as a lump if it looks like being abolished. I think that's a possibility if there is a change of government.

I saw recently a proposal that TFLS be limited to £40k. Why £40k? No idea.

GSP

Correct me if I am wrong but the 25% tax free element in uncrystallised funds will grow, or fall of course.

Alibert

Other elements to consider is . will the 25% always be available, might the govt reduce it ?

dunstonh

kidmugsy wrote: »

I saw recently a proposal that TFLS be limited to £40k. Why £40k? No idea.

Although the media and think tanks have been running publications every year since personal pensions were introduced saying that the tax-free cash is going to be abolished.

I believe that limitation on TFC was a Pensions policy institute paper where they looked at a range of options (in all areas) and attempted to attach costs and benefits. They looked at reducing to 20% from 25% as well as limiting the amount to the 75th percentile of the current distributions. Importantly, the report did put a caveat in that it sis not take into account behavioural change that would occur through the changes.

I believe there were a few flaws too. It said that 787% of individuals have a lump sum of under £40,000. However, most people have multiple pensions and you cant assume each pension is an individual.

The cost of the tax lost on TFC is costed at just £4 bn a year.

Restricting it to 20% would only reduce that to £3.5bn.
Restricting it to £36,0000 would reduce it to £2bn.

It noted that that whilst it reduces the cost, the amounts were not mch, and it would not improve the incentive to contribute to pensions and reduce the value of pension saving.

It didnt mention the political aspect at all. i.e. Would they get away politically capping or reducing TFC? And is it really worth it for such as small cost.

Salary sacrifice is costing £16.2bn a year. Tax relief is £36bn a year. So. £4bn looks very small compared to those. Would reducing the impact of salary sacrifice be politically easier to sell as people don't see it. Whereas the 25% TFC is easily understood.

Other elements to consider is . will the 25% always be available, might the govt reduce it ?

Since personal pensions were introduced in 1988, the changes since then have only increased the availability of tax-free cash and income. Not reduced it.

Random47

Am I correct in understanding then that if you do nott take 25% TFC at start then every withdrawal from DC pot that annually goes over income tax levels the first 25% of that is tax free?

TBH I'm 12-13 years away from any early retirement (planning late but never to late) and 17 years to SP, and appreciate legislation will change with changes is political will.

Just looking to understand what my favored course will be dependent on pot size, health, kids, wife, gym membership, golf fees, fuel prices, tweed jacket needs new patches...

NoMore

Random47 wrote: »

Am I correct in understanding then that if you do nott take 25% TFC at start then every withdrawal from DC pot that annually goes over income tax levels the first 25% of that is tax free?

Not quite, the 25% tax free is not related to tax bands, You could take 25% tax free of the value of your entire Pot and any further withdrawals are subject to tax, or take it in chunks with each withdrawal having 25% of the withdrawal tax free. Of course if you have no other income then you could withdraw an amount that leaves the tax free band after 25% of it is tax free (so 15800 at the moment)and pay no tax on the withdrawal each year.