Pension Pot - How to withdraw full cash amount

Linton

greatgimpo wrote: »

For the sake of clarity (to me), I want to ask a question related to this thread. Simple figures rounded for ease.

Pension pot of £80k. When I retire, my state pension will be £8,000 per annum as standard. I take 25% out of my pot, tax free leaving £60k. Assuming bottom tax bracket continues starting at £12,000, can I take out £3,999 per year out of my pot for 15 years so that I never hit the bottom tax bracket or will the remaining £60k always be taxed?

As long as the total income remains within the tax allowance you will not be taxed. Pension income is treated in exactly the same way as wages.

Dazed_and_confused

It will always be taxable income but as others have said any tax payable would depend on your total taxable income in the tax year you took any of the taxable element.

If you get the full new State Pension it is actually closer to £9k than £8k and unless you have applied for Marriage Allowance then your Personal Allowance is £12,500 so you could take about £3.7k before any tax would be payable.

Under the current 0% tax rates that are in place you would also be able to have £8,000/year in savings interest and dividend income before you had any tax to pay.

greatgimpo

£12k for me, £12k p.a. for wife for at least 15 years, nice house paid, surely that's do-able so long as she's not after a new conservatory, kitchen, car, luxury cruise etc etc

jamesd

greatgimpo wrote: »

Pension pot of £80k. When I retire, my state pension will be £8,000 per annum as standard. I take 25% out of my pot, tax free leaving £60k. Assuming bottom tax bracket continues starting at £12,000, can I take out £3,999 per year out of my pot for 15 years so that I never hit the bottom tax bracket or will the remaining £60k always be taxed?

You can but it'll take more than 15 years. Though marriage allowance would help.

The problem is in two parts:

1. You get tax relief on pension contributions until you're 75 so you should pay in 3600 gross a year. The tax gain is £720 if tax free on the way out or £180 if taxed at basic rate. Tax free in effect uses £2700 of personal allowance. Add £8767 of single tier state pension and that's £11467. Or £10700 at 8k. That leaves just £1800 a year of personal allowance until you're 76. You don't literally take it out each year in your situation but it's still money you'll try to get out eventually.

2. You'll probably get investment growth. At 3% a year plus inflation for a fairly cautious mixture that's £1800 a year just to stop the pot from growing. So until you're 76 the pot will stay at 60k unless there's some marriage allowance to use.

It's quite likely that you'll be dead before you can get it out tax free... so far. But of course there are solutions as well:

a. Deferring claiming your state pension. Defer for five years and that's an extra £40k out then you get an extra £2320 a year of extra inflation linked state pension. Without marriage allowance it'll still take quite a while after age 75 so maybe another year or two of deferring to help it along.

b. VCT use probably not relevant to your situation but useful if you don't want to defer. Take out say 36k taxable, tax due 7.2k. Buy 24k of VCTs and get back the 7.2k from HMRC. Hold for at least five years and you can sell to get the 24k out plus or minus investment returns.

greatgimpo

Thank you jamesd, that's a lot to absorb, and I'll work through it - thank you for your thoughts.

greatgimpo

jamesd wrote: »

a. Deferring claiming your state pension. Defer for five years and that's an extra £40k out then you get an extra £2320 a year of extra inflation linked state pension.

I understand the deferring bit and the maths behind it, but the 40k has me confused; surely if that's my only source of income for those five years, can I take the remaining 60k over those five years at £12k per year to exhaust it bang on time and keep within the £12k tax free limit?

Dazed_and_confused

a. Deferring claiming your state pension. Defer for five years and that's an extra £40k out then you get an extra £2320 a year of extra inflation linked state pension.
Originally posted by jamesd

Is that the important bit?

greatgimpo

Dazed_and_confused wrote: »

Is that the important bit?

What a pilchard. Of course it is - sorry, brain freeze. Thank you.

jamesd

greatgimpo wrote: »

I understand the deferring bit and the maths behind it, but the 40k has me confused; surely if that's my only source of income for those five years, can I take the remaining 60k over those five years at £12k per year to exhaust it bang on time and keep within the £12k tax free limit?

I was looking at the extra effect of deferring, not total effect. Five years at 12k would leave in the pot only the five years of 3600 in and any growth. Perhaps 20k* total of which 4500 is available as a tax free lump sum that you might have been withdrawing instead of accumulating, so say 15500 taxable still to get out.

Once you stop deferring the combined state pension is 10320. Add 2700 from the 3600 going in and that's 13020, so you'd be accumulating until 75 still. Barring marriage allowance of 1250 that would get you back in to net withdrawing even before 75.

So yes, you're on the right track but another year or two of deferring could be useful.

* 3% on half of 60k plus 3% on two 3600s plus five 3600s.

jamesd

greatgimpo wrote: »

What a pilchard. Of course it is - sorry, brain freeze.

Actually, no pilchards were harmed in that post.

Yes, the 720 extra a year is good but to get that instead of 180 takes getting it out tax free and that requires state pension deferring to achieve it without dying first. And deferring for say 6 years takes an 8k state pension to 10784... delivering 2784 more with no tax due for the rest of life.

So I'd say that it takes the integrated plan to properly exploit the potential. Not only all 60k out but the 720s and the 2784 for life.