Tax free lump sum and ongoing tax on balance

Jurgen500

Im starting my retirement planning and need to clarify the tax situation. Im aware that I can withdraw a tax free lump sum amounting to 25% of my pot. If i want to take a flexible drawdown on the balance after I take the lump sum, is that whole remaining balance subject to tax and will my annual PAYE personal allowance still be relevant?

so for example, assuming my pension pot is £100,000, I take a lump sum of £25,000 tax free, leaving £75000. If I draw down £7500 a year will i pay tax on it @ 25% or will the £7500 be tax free given my annual personal allowance is £12500?

Please be gentle......

NottinghamKnight

Any withdrawal above the 25% tax free is taxable, and is treated no different to other earnings really. So in your example if you had income of less than £5k you would pay no tax, then pay 20% once you are above the personal allowance. If you have other earnings above £42.5k then you start to pay 40% tax etc

Albermarle

so for example, assuming my pension pot is £100,000, I take a lump sum of £25,000 tax free, leaving £75000. If I draw down £7500 a year will i pay tax on it @ 25% or will the £7500 be tax free given my annual personal allowance is £12500?

Basic rate income tax is 20% , not 25% . Otherwise what you say is correct .

You should be clear why you want to take the tax free 25% in one go . If you have a good reason to do it ( new car etc ) then fine but otherwise it is best left in the pension and/or taken out in stages ( most pension providers allow this ).

Jurgen500

Thanks for the response. Simpler than I feared! 

So if I DONT take a lump sum from the £100,000, am I right in understanding that if I draw down, say £20,000 a year, the first 25% is tax free Each year and the remaining £15,000 has a further tax allowance of £12500 thus only the remaining £2500 is taxed? (Im assuming current tax rules, of course)

molerat

Providing that is your only income then yes, don't forget things like savings interest.  The taxable 75% is simply part of your total income for the year that the £12500 is set against, the same as a job except you don't pay NI

Jurgen500

Many thanks for the feedback everyone. Much appreciated! Im at the spreadsheet phase so the info has helped immensely. Just as an aside to the original questions, what life expectancy are folk using for calculations? Im 61 and my family history indicates a general age of around 75 When “cloggs are popped“ so thinking 15 years..... now that puts things into perspective!

NedS

Jurgen500 said:

Many thanks for the feedback everyone. Much appreciated! Im at the spreadsheet phase so the info has helped immensely. Just as an aside to the original questions, what life expectancy are folk using for calculations? Im 61 and my family history indicates a general age of around 75 When “cloggs are popped“ so thinking 15 years..... now that puts things into perspective!

Average life expectancy is more like 85, so I would use that as a minimum, and more sensibly maybe 100. A lot will depend on whether you have other sources of fixed income (state pension, DB / final salary pensions) or are totally dependent on DC drawdown pension income. I wouldn't want to be totally dependent on DC drawdown pension income that runs out at 75 and then find I live for at least another 10 years.

garmeg

Jurgen500 said:

Many thanks for the feedback everyone. Much appreciated! Im at the spreadsheet phase so the info has helped immensely. Just as an aside to the original questions, what life expectancy are folk using for calculations? Im 61 and my family history indicates a general age of around 75 When “cloggs are popped“ so thinking 15 years..... now that puts things into perspective!

I project my cashflows to age 105. I am 56.

It allows for 2 small DB pensions, my SIPP and the new state pension from 67.

Albermarle

Jurgen500 said:

Thanks for the response. Simpler than I feared! 

So if I DONT take a lump sum from the £100,000, am I right in understanding that if I draw down, say £20,000 a year, the first 25% is tax free Each year and the remaining £15,000 has a further tax allowance of £12500 thus only the remaining £2500 is taxed? (Im assuming current tax rules, of course)

The above is correct . Actually if  you have no other taxable income , you can take £16,666 in total tax free . £12,500 taxable but within your personal allowance and £4,166 tax free. However you need to check with your provider what is possible with their system. If it is an old pension there might be some restrictions on what is possible.
The average life expectancy for a 61 year old man is around 85 . Note that this is average and 50% will live longer than that .
If you are otherwise reasonably healthy and not too many bad habits that helps > Plus being educated and not having had a strenuous manual job also pushes you more into the above average .

Stargunner

Albermarle said

You should be clear why you want to take the tax free 25% in one go . If you have a good reason to do it ( new car etc ) then fine but otherwise it is best left in the pension and/or taken out in stages ( most pension providers allow this ).

Is it not dependant on how big you pension pot is and whether you have any other income and even if you don’t have any, does it depend on how many years you are away from getting your state pension.

Albermarle

Stargunner said:

Albermarle said

You should be clear why you want to take the tax free 25% in one go . If you have a good reason to do it ( new car etc ) then fine but otherwise it is best left in the pension and/or taken out in stages ( most pension providers allow this ).

Is it not dependant on how big you pension pot is and whether you have any other income and even if you don’t have any, does it depend on how many years you are away from getting your state pension.

You are right it can depend on a lot on your personal circumstances.
However it is clear from many posts on this forum that many people just take the 25% tax free as soon as it is available, just because it is there. Also many people, including a friend I met recently , think you have to take it all in one go.
So I was just asking to the OP if they had thought it through .