Pension Drawdown? Bewildered.

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
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DavidJonasDavidJonas Forumite
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I am utterly confused about pension drawdown. The advice that is out there just confuses me even more, so much of it seems to be contradictory!

I have a defined benefit pension with Aviva. At 55, I will most likely want to start withdrawing some money, chiefly because that is when my eldest may start Uni.

However, I don't want to pay any more tax than I have to, and I do want to keep on working and keep on contributing.

I should have saved more when I was younger, so I am having to pedal harder now. However, I am finally paying higher rate tax.

Therefore, I do not want the £4,000 money purchase allowance to come crashing down and cut me off. I am contributing more than that each year currently.

Aviva say this:

https://www.aviva.co.uk/retirement/using-your-pension-money/income-drawdown/withdrawing-some-of-your-pension-money/

...which suggests that I could draw down my pension in lumps and each time I would take 25% of the instalment and the other 75% of the instalment would stay invested but go into a drawdown pot that would not be paid to me then - and which presumably I could not touch without dire consequences (i.e the £4,000 money purchase allowance).

So, let's say I have $100,000 invested.

I take £10,000 tax free and £30,000 goes into the untouchable drawdown pot. £60,000 stays where it is. My money purchase allowance stays at £40,000.

Is this right?

I could take another £15,000 tax free, but this would lock everything up in that drawdown closet. But presumably new contributions would have their own 25% tax free state? Or is this 25% set in stone the moment you start doing all this?

I ask because it seems odd, and when something seems odd I suspect I am missing half of the picture.

What is to stop me increasing my pension contribution to offset that £10,000? In other words, just pumping it back in from my income, and avoiding higher rate tax on it?

In theory (if my income was high enough) couldn't I take out £10,000 cash, make an additional £16,700 contribution from my income that year and they would balance each other out? Obviously, with the drawback of having £30,000 in an untouchable pot. But with the total value of the pension £6,700 higher than it was?

Somehow I can't believe HMRC would allow people to recycle money like this (?).

Surely a real high flyer could just take out £40,000 (locking away £120,000), divert £40,000 of his city bonus into his pension and be sitting on a pension that was the same size overall, with £40,000 tax free in his pocket?

Replies

  • SilvertabbySilvertabby Forumite
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    I have a defined benefit pension with Aviva. At 55, I will most likely want to start withdrawing some money, chiefly because that is when my eldest may start Uni. Posted by DavidJonas
    Before anyone pitches in, are you sure that you have a defined benefit (ie, final salary/career average) pension rather than a defined contribution plan?

    If it really is a DB pension, then it can't be 'drawn down' - unless you transfer it to a personal pension/SIPP.
  • edited 28 September 2018 at 1:28PM
    MndMnd Forumite
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    edited 28 September 2018 at 1:28PM
    You are right I think if you were talking about a dc pension, if you have your 100k in a sipping then you can take up to 25% tax free at will..1 penny over that will expose you to the MPAA of £4000

    As stated above if you are talking about a db pension, then you will need to transfer to a sipp or similar which is a whole new ballgame

    There are restrictions on recycling cash into the pension pots to prevent excessive use of this facility
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  • LHW99LHW99 Forumite
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    Also, if it is DB, the pension would be reduced for each year before the normal retirement age of your scheme that you take it
  • DavidJonasDavidJonas Forumite
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    Before anyone pitches in, are you sure that you have a defined benefit (ie, final salary/career average) pension rather than a defined contribution plan?

    If it really is a DB pension, then it can't be 'drawn down' - unless you transfer it to a personal pension/SIPP.

    Sorry, yes. Defined contribution. Share purchases, basically.

    Gah! Can't even get that right.
  • DavidJonasDavidJonas Forumite
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    Mnd wrote: »
    You are right I think if you were talking about a dc pension, if you have your 100k in a sipping then you can take up to 25% tax free at will..1 penny over that will expose you to the MPAA of £4000

    As stated above if you are talking about a db pension, then you will need to transfer to a sipp or similar which is a whole new ballgame

    There are restrictions on recycling cash into the pension pots to prevent excessive use of this facility

    It is defined contribution. Sorry for the misunderstanding.

    Is the 25% set in stone? How best to put this?

    If I start meddling with this at Age 55 and I have £100,000 in there and let's say I go nuts and take £25,000 tax free and the rest goes into a drawdown fund (that I can't touch ever without triggering the mpaa).

    If I work for another 10 years and contribute another £50,000 (say), does that new money itself build up a tax free portion? At the age of 60 (5 years in), with another £25,000 in there, can I take £6250 of that tax free? With the other £18,750 going into the drawdown piggy bank.

    Or is the tax free sum determined for once and forever when I took the first amount, and is limited to that?
  • atushatush Forumite
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    Yes, new contributions will start building a new TFLS.
  • DavidJonasDavidJonas Forumite
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    atush wrote: »
    Yes, new contributions will start building a new TFLS.

    Thanks. That is helpful.

    Think I understand it now!
  • AlbermarleAlbermarle Forumite
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    Surely a real high flyer could just take out £40,000 (locking away £120,000), divert £40,000 of his city bonus into his pension and be sitting on a pension that was the same size overall, with £40,000 tax free in his pocket?

    Just to emphasise what another poster mentioned . The above is known as recycling and it is not allowed under HMRC rules. Defining what is clearly recycling, and what is not is subject to a number of tests.
    Indirectly it is a form of tax evasion and genrally frowned upon.
  • MndMnd Forumite
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    Going from memory.sorry if its a bit wrong

    It is not considered recycling if
    1) you take no more than 7500 tax free in a 12 month period
    2) it does not significantly increase your pension contributions over a 5 year average
    3) you didn't intend to do it as recycling (hard to prove)

    There are proper guidelines on the internet..try this explains it better than me

    https://www.google.co.uk/url?sa=t&source=web&rct=j&url=https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/&ved=2ahUKEwicnOa8nd7dAhUYM8AKHcsPCq0QFjACegQICxAP&usg=AOvVaw375AxiMabHaCYKbGadiJJk
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