When to start drawdown

Lego_Lass

I have recently been made redundant at 59. With my wife’s salary & savings, I have enough to cover bills. I am due a DB pension of £6k pa at 60. I have a workplace pension of £350K that I still contribute £2880 per year.

I am thinking of drawing down £6K per year from my workplace pension to keep below my personal allowance, but would the savings on income tax probably outweigh the returns if left in the pension?

 

Also once I begin draw-down, can I still pay £2880 to gain the tax relief?

Albermarle

The first 25% of any DC pension is paid tax free.
You could take this all at once - so £87, 500 ( but not usually a good idea unless you have a specific need for it)
You could take it in smaller sums over a period of time .
Either of the two options above would leave 75% of the pension pot which would be all potentially subject to income tax on with drawal
Other options include UFPLS payment or phased flexi access drawdown, which means taking some tax free and some taxable income at the same time. 
Not all pension providers can facilitate all options though
You can have a free one hour pensions discussion with PensionWise, which might prove useful.
https://www.pensionwise.gov.uk/en
Plus this is a useful govt website
https://www.pensionsadvisoryservice.org.uk/

green_man

You can take UFPLS from your pot (assuming it is actually a Defined Contribution pot), that does not officially put you into drawdown as such, this means you can continue adding to your pot, but you might need to watch you don’t breech the recycling rules.

To take account of your personal allowance ( assume 12500) then you could take £6k DB, plus a UFPLS from your pot off £8666. This is because 25% of that withdrawal is tax free so you would pay tax on 8666 x 0.75 = £6500.

If you actually do need the money in the shortish (< 5 years say) term then this is likely the best approach. If money is not actually needed for a long time then leaving invested might be better. However you can always reinvest this money in say a Stocks and Shares ISA or similar, which would provide more flexibility on withdrawal.

Albermarle

You can take UFPLS from your pot (assuming it is actually a Defined Contribution pot), that does not officially put you into drawdown as such, this means you can continue adding to your pot,

This is not correct . If you take one penny of taxable income from a DC pot , the MPAA rule kicks in .

As 75% of any UFPLS payment is taxable then ….

To take account of your personal allowance ( assume 12500) then you could take £6k DB, plus a UFPLS from your pot off £8666. This is because 25% of that withdrawal is tax free so you would pay tax on 8666 x 0.75 = £6500.

This calculation is correct but from then on the maximum possible annual contribution to a pension is £4000 due to the issue mentioned above.. Of course once they start taking money from a pension the majority of people would no longer be thinking about contributing , so no issue.

However can be an issue for some. 

green_man

Albermarle said:

You can take UFPLS from your pot (assuming it is actually a Defined Contribution pot), that does not officially put you into drawdown as such, this means you can continue adding to your pot,

This is not correct . If you take one penny of taxable income from a DC pot , the MPAA rule kicks in .

Apologies, Albermarle is correct, I was thinking about your statement about continuing to add £2880, which you could do.

ffacoffipawb

Albermarle said:

You can take UFPLS from your pot (assuming it is actually a Defined Contribution pot), that does not officially put you into drawdown as such, this means you can continue adding to your pot,

This is not correct . If you take one penny of taxable income from a DC pot , the MPAA rule kicks in .

Not if the taxable income comes from an annuity purchased by that fund.

Albermarle

ffacoffipawb said:

Albermarle said:

You can take UFPLS from your pot (assuming it is actually a Defined Contribution pot), that does not officially put you into drawdown as such, this means you can continue adding to your pot,

This is not correct . If you take one penny of taxable income from a DC pot , the MPAA rule kicks in .

Not if the taxable income comes from an annuity purchased by that fund.

Then the taxable income is not coming from the DC fund but from a purchased annuity.