Avoid Paying Tax on Drawdown?

GSP

Currently I’m doing part and part to make full use of my personal allowance (wife’s is included as well), but as I withdraw my tax free allowance will run out one day and every withdrawal thereafter will be taxable.
Are there anyways I could pay less tax when this happens? Thanks

Albermarle

Are there anyways I could pay less tax when this happens?

Probably not unless you want to get involved in complicated things like Venture Capital trusts .

The only things certain in life are death and taxes , and the Chancellor certainly needs the money.

Mickey666

AIUI, a drawdown pension pot can be inherited at which point the full amount becomes tax-free.  The pot value is also not included in the estate for IHT purposes.  I'm not sure if there are any conditions though, such as only tax-free if willed to spouse or other family.

Of course, relying on death is a somewhat extreme tax-avoidance plan

NedS

GSP said:

Currently I’m doing part and part to make full use of my personal allowance (wife’s is included as well), but as I withdraw my tax free allowance will run out one day and every withdrawal thereafter will be taxable.
Are there anyways I could pay less tax when this happens? Thanks

No, all you can do is to make sure you fully utilise your tax free allowances. Will both you and your wife fully utilise your respective tax free allowances? If not, one of you could gift 10% of your tax free allowance to the other under the Marriage Allowance, which may help.
https://www.gov.uk/marriage-allowance

GSP

Albermarle said:

Are there anyways I could pay less tax when this happens?

Probably not unless you want to get involved in complicated things like Venture Capital trusts .

The only things certain in life are death and taxes , and the Chancellor certainly needs the money.

He sure does! Makes you wonder what plans he has.

GSP

NedS said:

GSP said:

Currently I’m doing part and part to make full use of my personal allowance (wife’s is included as well), but as I withdraw my tax free allowance will run out one day and every withdrawal thereafter will be taxable.
Are there anyways I could pay less tax when this happens? Thanks

No, all you can do is to make sure you fully utilise your tax free allowances. Will both you and your wife fully utilise your respective tax free allowances? If not, one of you could gift 10% of your tax free allowance to the other under the Marriage Allowance, which may help.
https://www.gov.uk/marriage-allowance

Yes I’m already doing that thanks NedS.

Sailtheworld

It's something to think about for people who might not be filling their ISA allowance - they may as well take tax free cash to fund them as soon as possible. No point paying additional tax on the compounding which could be significant.

NedS

Sailtheworld said:

It's something to think about for people who might not be filling their ISA allowance - they may as well take tax free cash to fund them as soon as possible. No point paying additional tax on the compounding which could be significant.

Basic maths does not support your hypothesis. Say you have £100,000 in a pension, take 25% tax free lump sum of £25,000 and invest it in an ISA for a number of years and achieve 50% growth, you would have £25,000 + 50% = £37,500 tax free.

If you left that money in the pension, and achieved identical 50% growth over the same time period, you would have £150,000 pot of which you can take 25% tax free to give you the same £37,500 tax free amount.

Generally it is considered advantageous to leave money within the pension wrapper as it is protected from things such as inheritance tax and means-tested benefit assessments. All else being equal, you will not pay less tax by withdrawing a tax free lump sum and investing it in an ISA.

jamesd

More detailed analysis tends to make it a good idea even though the mathematics is right:
1. ISA charges tend to be lower and getting at the money easier
2. If done with taxable money you've locked in the current income tax rate.
3. You can be reducing the potential for a lifetime allowance charge.

Depends also on the rest of a person's situation.

Albermarle

All else being equal, you will not pay less tax by withdrawing a tax free lump sum and investing it in an ISA.

Except as mentioned by Jamesd you are reaching the LTA limit for the pension.

Taking £20K out for a few years , or more if you do not use an ISA for all of it ,  means at least the investment growth on that money does not count towards the LTA.

Even better you can invest the ISA in 100% equity and reduce the % equity in the pension . So keeping the same overall % equity but reducing growth in the pension. 

Sailtheworld

NedS said:

Sailtheworld said:

It's something to think about for people who might not be filling their ISA allowance - they may as well take tax free cash to fund them as soon as possible. No point paying additional tax on the compounding which could be significant.

Basic maths does not support your hypothesis. Say you have £100,000 in a pension, take 25% tax free lump sum of £25,000 and invest it in an ISA for a number of years and achieve 50% growth, you would have £25,000 + 50% = £37,500 tax free.

If you left that money in the pension, and achieved identical 50% growth over the same time period, you would have £150,000 pot of which you can take 25% tax free to give you the same £37,500 tax free amount.

Yes, you're right!

My complicated spreadsheet wasn't comparing apples with apples. Comparing against a SIPP route where 100% instead of 75% of the fund was taxable.