Drawdown tax

NeilC1965

Please let me know if I have this right: -


Assume I drawdown 30k pa from my pension pot.
Personal allowance is 12.5k
I can take 25% of every drawdown tax free , which in this case is 7.5k
Total tax free is therefore 12.5k + 7.5k = 20k
Balance to pay tax on at 20% is 10k = 2k tax
Conclusion is that 30k gross gives 28k net after tax on every 30k until the dc pot runs out
dc pot is around 930k , so sunlikely to hit the LTA issue if that keeps on increasing at CPI level

SeniorSam

All drawdown payments will be made after deduction of tax. The rate of tax is what the pension provider has been advise of by the tax office according to your tax code. It would be wise to speak with your pension provider to find out what tax code they have registered for you and if not correct, then speak with the tax office and ask them to notify the pension provider

NeilC1965

SeniorSam wrote: »

All drawdown payments will be made after deduction of tax. The rate of tax is what the pension provider has been advise of by the tax office according to your tax code. It would be wise to speak with your pension provider to find out what tax code they have registered for you and if not correct, then speak with the tax office and ask them to notify the pension provider

But is my maths correct? i.e 30k gross nets 28k assuming basic rate tax payer?

Spreadsheetman

NeilC1965 wrote: »

But is my maths correct? i.e 30k gross nets 28k assuming basic rate tax payer?

Yes, with those assumptions there is £2k tax to pay.


(the LTA issue is another thing entirely - that will depend on growth on investments etc.)

tacpot12

If you don't increase your drawdown amount in line with CPI, you are going to be very poor in the later years, unless you have DB pensions and/or state pension entitlement that kick in, so you will need the LTA to rise in line with CPI so that you can increase your drawdown amounts without breaching the LTA.

Albermarle

But is my maths correct? i.e 30k gross nets 28k assuming basic rate tax payer?

Yes it is correct , if you have no other taxable income at all.
When /if you start drawing the state pension , your tax code on the drawdown pension will be decreased by that amount , so you will start to pay more tax on withdrawals.

cjking

I think LTA might be an issue. Assume for simplicity inflation is zero so income stays level at 30K in real terms and LTA stays at £1055K. If you've retired at 55, you will have used 20x30K=600K of LTA by 75. That leaves £1055K-600K = £455K of unused LTA. So your remaining uncryallised pension balance will need to have fallen by half in order for you not to fall foul of the LTA.

If I were taking only 30K from 930K, I'd want my balance to stay the same or be rising. That's a 3.23% yield. The Vanguard Developed Europe ETF has a dividend yield higher than that.

I have run some other scenarios and in general it seems to be you will hit the LTA unless you make close to zero real return on your investments. (I always assumed income would increase by inflation, I'm assuming you don't really mean to take an income that is falling in real terms.)

In your strategy, all investment growth in excess of inflation counts against your LTA limit. In the alternate one of crystallising everything up-front, you can take any growth as income, in which case none of the growth will count towards your LTA limit.

squirrelpie

NeilC1965 wrote: »

Please let me know if I have this right: -

Assume I drawdown 30k pa from my pension pot.
Personal allowance is 12.5k
I can take 25% of every drawdown tax free , which in this case is 7.5k
Total tax free is therefore 12.5k + 7.5k = 20k
Balance to pay tax on at 20% is 10k = 2k tax
Conclusion is that 30k gross gives 28k net after tax on every 30k until the dc pot runs out
dc pot is around 930k , so sunlikely to hit the LTA issue if that keeps on increasing at CPI level

If you move money into drawdown (i.e. crystallize it) then you have to take the whole untaxed 25% at the outset. You can then take as much of the remaining money as you like in however many payments you like and each payment will be taxed.

You can move an amount into drawdown and immediately withdraw the whole amount as you have suggested, which has the same effect as making a UFPLS withdrawal. The taxation will be the same but note that you will have to complete paperwork for every drawdown payment in this case.