Maximising Tax Free Amount

Moonwolf

I've very indirectly asked this before, I'm double checking this on its own.

I am clear that once you touch one of your pensions there are restrictions on what you can pay in in the future and that might be a bad idea if you are going to work again and would prefer to increase your pension.

However if you are forced to begin drawing down and you have no other income (but you will have DB pots later so running out or pension is not an issue).

Am I right in thinking that taking the full tax free 25% then drawing down up to your personal allowance each year even if you don't need it yet will help minimise the tax.

£12k taken out if you have no other income is £12K. £12k taken out if you already have income over the personal allowance is worth £9.6K after tax. So drawing down before state pension and DB schemes kick in can be a good idea?

Audaxer

Yes, if you have no other income you can drawdown up to your Personal Tax Allowance each year, and incur no tax. If you don't need to spend all of the £12,500 drawdown you can reinvest it in the same fund(s) within an S&S ISA, so you would be effectively moving your investments so that when you do need to sell them, they won't incur tax.

MallyGirl

If you don't want to put more than £4k pa in any more then yes it makes sense to make use of the £12.5k personal allowance. You could move the proceeds to S&S ISA if you don't need it, ensuring that it remains free of tax in the future.

snap!

SonOf

Am I right in thinking that taking the full tax free 25% then drawing down up to your personal allowance each year even if you don't need it yet will help minimise the tax.

Its an option. It may not be the method that will maximise the tax free cash the most. Phasing the 25% each year will usually result in the greatest amount of the 25% TFC being paid.

TBC15

Not sure if this helps.

I think I may have missed a good point when I crystallized the whole of my pension and took the full 25% tax free.

My thoughts were invest the 25% and take the pension at just below my tax allowance.

Unfortunately the 25% taken of the whole pot now throws up problems when making use of the CGT allowance every year.

In hindsight it would probably have been more efficient to only chrysalises enough of the pension to provide this year’s tax allowance + the 25% tax free.

Moonwolf

Thanks for the replies and confirming my understanding, this is part of my what if redundancy planning.

shinytop

TBC15 wrote: »

Not sure if this helps.

I think I may have missed a good point when I crystallized the whole of my pension and took the full 25% tax free.

My thoughts were invest the 25% and take the pension at just below my tax allowance.

Unfortunately the 25% taken of the whole pot now throws up problems when making use of the CGT allowance every year.

In hindsight it would probably have been more efficient to only chrysalises enough of the pension to provide this year’s tax allowance + the 25% tax free.

TBC, I'm thinking of doing the same as you. Can you explain a bit more what you mean? Is it that any gains made in your invested TFLS would be subject to CGT when you come to sell unit/shares? Wouldn't you have to sell an awful lot before you actually had to actually pay any CGT?

Albermarle

Am I right in thinking that taking the full tax free 25% then drawing down up to your personal allowance each year even if you don't need it yet will help minimise the tax.

Just to confirm what has already been said. There is no need to take the whole 25% tax free amount up front. You could take up to £16,666 a year . 25% tax free leaves £12,500 taxable ( or not taxable if you have no other income )

bowlhead99

shinytop wrote: »

TBC, I'm thinking of doing the same as you. Can you explain a bit more what you mean? Is it that any gains made in your invested TFLS would be subject to CGT when you come to sell unit/shares? Wouldn't you have to sell an awful lot before you actually had to actually pay any CGT?

If your investments increase in value at (say) 4% over and above inflation of (say) 3%, the total nominal value would be (roughly) doubling every decade and quadrupling every two decades.

So for example taking your maximum 25% lump sum from a £400k pension as soon as you can (rather than because you actually need it), you end up with £100k invested in an unwrapped portfolio which might give £100k gains in a decade or 300k gains over two decades, which is well into CGT territory.

You are right of course that you only pay CGT if you sell a lot all at once, which is why someone might take steps to create £10k of gains each year rather than leaving it until they have £100k of gains all at once.

That would obviously give some management or administration challenge to create the CG result you want.

The numbers above are a simplification of course: you might not aiming to create such high rates of returns; a portion of the returns will be income rather than capital; you may be moving the lump of unwrapped investments into ISA wrappers if you have capacity to do that, which stops the compounding of potentially-taxable gains; and so on.

BoxerfanUK

We aim to have my DW's DC pot at around 400K by April 22 when she plans to retire aged 60. Originally, we'd always planned to.....

1) Take the max 25% PCLS leaving 300K in the pot
2) Draw-down each year only to the personal tax allowance
3) At SP age (67) reduce the draw-down to stay within personal allowance
4) Calculate roughly how many years she had until the pot ran out.

I thought it was oh so simple :rotfl:......THEN, I started trying to 'educate' myself via this forum, reading about SWR's so that the pot wouldn't run out (never even considered that!!:huh:) UFPLS (thus leaving more invested in the pot for it to continue growing.... or declining!) Not to mention the possibility of an annuity instead!

So now it's really NOT so simple after all. :eek:

Thank goodness I have a reasonable DB pension and don't need to think about the problem twice over.