Taxable and Non-taxable Income

Hugh_J

Hi,
I currently have an old personal pension with Phoenix worth around £150k. I have already been informed that this policy does not allow flexi access drawdown so I will need to transfer it to another company. I am aged 60 and have stopped work, and want to access some regular income.

Before I start discussing my options with an advisor I wondered if anyone can give me a definitive answer to my query. I am not using any of my personal income tax allowance at present so would it be possible to take some taxable income from a drawdown policy to cover my needs (around £9,000 a year) without taking any of my tax-free cash? I don't plan to take any cash lump sums at present, just income.

I think it would make sense if I could do this as a way of making use of my personal allowance meantime. Once I receive my state pension in 6 years time it will use up much of my personal allowance, so any tax free cash I am entitled to will likely be of more benefit to me from that point onwards.

I have tried googling this and can't seem to get a clear answer either way. Some articles say no, you would have to take a quarter of any income from the tax-free part, but other seem to indicate that I would be able to take taxable income only and leave the tax-free cash untouched.

Cheers,
Hugh J

dunstonh

I am not using any of my personal income tax allowance at present so would it be possible to take some taxable income from a drawdown policy to cover my needs (around £9,000 a year) without taking any of my tax-free cash?

Technically yes but there would be no point as it would mean losing the 25% entitlement. i.e. if the 75% matched £9000 you would still need to draw the 25% or lose the entitlement to that 25% tax free (meaning future withdrawal would see it taxed). So, in reality, you wouldn't do it.

I think it would make sense if I could do this as a way of making use of my personal allowance meantime.

In which case the 75% uses up your personal allowance and the 25% that is not needed can be reinvested back into an S&S ISA keeping it tax free until a later date.

Hugh_J

Dunstonh,
Thanks for your answer. I guess I had hoped that I could leave the tax free cash until I actually need it, but it sounds like I have no option but to take it and put it into as ISA or something, like you suggest.

Cheers,
Hugh J

cloud_dog

In my opinion it would make sense to maximise your withdrawals so as to ensure you use all of your annual tax allowance, whilst you are not earning/receiving any taxable income.

Either by taking the 25% upfront and then drawing down your personal allowance (£11800 I believe for 2018/19), or by utilising UFPLS (uncrystalised withdrawals).

If you went down the UFPLS route you would obviously need a provider who supports this option but you would then draw the maximum without crystallising the pension or triggering any additional taxation. For 2018/19 you could, assuming no other taxable income, withdraw via UFPLS £15733 (£3933 as 25% tax free, and £11800 personal allowance).

For either of these options you would 'use' £9k and place the rest in to an ISA (S&S ISA I would suggest).

One of these two options is what I am planning for my wife so as to extract as much of her SIPP money tax free before she starts receiving DB and SPs and begins paying income tax.

zagfles

Yes UFPLS sounds sensible - if you're not using any of your personal allowance you can take 4/3 of the personal allowance as a UFPLS and pay no tax, as a quarter of the UFPLS is tax free, the other 3/4 is taxable but is covered by your PA. So at this year's rates, a UFPLS of £15800. Any decent drawdown provider will support UFPLS.

Because of the way PAYE works you might pay tax initially, it'll either sort itself out over the tax year (by getting tax refunds in your "payslip") or you can claim a refund from HMRC.

The other way is to use phased drawdown - you "crystallise" £15800 each year, taking a quarter of it (£3950) as a PCLS, and take £987.50 a month as "taxable" income but on which you won't pay tax as it's covered by the PA. Again initially you might pay tax until they've sorted out your tax code, but will get it refunded.

xylophone

https://www.pensionwise.gov.uk/en/appointments

might be helpful.

http://www.hl.co.uk/pensions/sipp/transfer-to-the-vantage-sipp

https://www.hl.co.uk/free-guides/your-options-at-retirement