Avoid Paying Tax on Drawdown?

Stargunner

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.

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.

I was thinking of retiring at age 60 and my state pension age is 67. I would have no income during those 7 years and could live off savings and a recent inheritance. 

I was thinking would I not be better off taking £12.5k per year for those 7 years from my pension to make use of my personal tax allowance and putting it straight into an isa to keep it tax free.

TBC15

Stargunner said:

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.

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.

I was thinking of retiring at age 60 and my state pension age is 67. I would have no income during those 7 years and could live off savings and a recent inheritance. 

I was thinking would I not be better off taking £12.5k per year for those 7 years from my pension to make use of my personal tax allowance and putting it straight into an isa to keep it tax free.

That’s what I’m doing at the moment.

Albermarle

Stargunner said:

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.

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.

I was thinking of retiring at age 60 and my state pension age is 67. I would have no income during those 7 years and could live off savings and a recent inheritance. 

I was thinking would I not be better off taking £12.5k per year for those 7 years from my pension to make use of my personal tax allowance and putting it straight into an isa to keep it tax free.

Unless you have already taken the tax free cash, then taking £12.5K of taxable income would also mean generating some tax free cash as well . In total you can take £16,666 without paying any tax.

NedS

Stargunner said:

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.

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.

I was thinking of retiring at age 60 and my state pension age is 67. I would have no income during those 7 years and could live off savings and a recent inheritance. 

I was thinking would I not be better off taking £12.5k per year for those 7 years from my pension to make use of my personal tax allowance and putting it straight into an isa to keep it tax free.

Yes, it makes absolute sense to make sure you are fully utilising your income tax allowance each year. In the discussion above, we were talking about tax free lump sum withdraws. You are talking about taxable withdraws that fall under your personal income tax allowance. If you do not use your income tax allowance each year, you lose it so better to withdraw some taxable income from your pension whilst you can and make full use of your income tax allowance now than pay income tax on it later.

jamesd

Yes, using your personal allowance is usually a good idea.

Can be exceptions for means tested benefits, inheritance planning and assorted niches.

Stargunner

Albermarle said:

Stargunner said:

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.

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.

I was thinking of retiring at age 60 and my state pension age is 67. I would have no income during those 7 years and could live off savings and a recent inheritance. 

I was thinking would I not be better off taking £12.5k per year for those 7 years from my pension to make use of my personal tax allowance and putting it straight into an isa to keep it tax free.

Unless you have already taken the tax free cash, then taking £12.5K of taxable income would also mean generating some tax free cash as well . In total you can take £16,666 without paying any tax.

Can you please advise how I could take £16,666 per year without psyinfg tax as I thought the limit was £12,500. 

Thrugelmir

25% is tax free, the remainder is cover by annual personal allowance, 

kangoora

£16,666 x 75% = £12,499.50.

So, 25% of £16,666 = £4,166.5

£16,666 - £4166.5 = £12,499.5

If withdrawing from a pension (obviously) you get 25% tax-free so you by withdrawing £16,666 you are getting £4,166 tax free and £12.5k taxable, which is your personal allowance so no tax to pay on it. You need to ask for a UFPLS payment from your pension provider of £16,666.

Stargunner

kangoora said:

£16,666 x 75% = £12,499.50.

So, 25% of £16,666 = £4,166.5

£16,666 - £4166.5 = £12,499.5

If withdrawing from a pension (obviously) you get 25% tax-free so you by withdrawing £16,666 you are getting £4,166 tax free and £12.5k taxable, which is your personal allowance so no tax to pay on it. You need to ask for a UFPLS payment from your pension provider of £16,666.

Am I right in thinking that you can only do UFPLS if you haven”t taken 25% of your pension pot tax free.

Mistermeaner

Is there a logic in perhaps taking the full 25% tax free lump sum asap in case future legislation removes this ?