Stupid question alert

SWB

Apologies for probably a very basic question but I dont know a lot about pensions and I cant seem to find an answer on google.
Example only - Aged 55, pension pot of 100k. 
If I take 25k to pay off my mortgage, is any of the 25k taxed? (I keep reading about 25% tax free but cant seem to find out whether thats 25% of the total pot or 25% of the withdrawal?)
If the whole 25k is tax free, does that mean I couldnt take tax free 10k out the following year so I would have to pay 40% tax on the whole 10k?
If I have to pay tax on 18.75k of the 25k, does that mean I could take out 10k the following year and pay tax on the 7.5k?
Thanks

Albermarle

Three basic options 
1) You can take 25% /25K tax free - when you take income from the remaining £75K it will be taxable at your marginal rate. This is basic drawdown ,
2) You take the £25K tax free in stages and if you want you can also take some taxable income at the same time , or later 
. Flexible drawdown
3) You can take UFPLS payments . Each payment is exactly 25% tax free and 75% taxable.
Two points to note 
1) Once you take any TAXABLE income you can not add more than £4Kpa to your pension in future
2) Not all providers offer all options . Older pensions may not offer any of the above pensions. You may have to transfer the pension ( which is easy ) to get full flexibility.

dunstonh

If I take 25k to pay off my mortgage, is any of the 25k taxed? (I keep reading about 25% tax free but cant seem to find out whether thats 25% of the total pot or 25% of the withdrawal?)

It depends on how you take it.

If you use income drawdown and fully crystalise the fund, this will pay all the 25% tax free cash up front.

If you use UFPLS, then 25% of what you draw will be tax free and the other 75% will be taxable, subject to your personal allowance.

If the whole 25k is tax free, does that mean I couldnt take tax free 10k out the following year so I would have to pay 40% tax on the whole 10k?

If you fully crystallised that fund then you dont get a tax free lump sum on that part again.

If I take 25k to pay off my mortgage,

Taking money out of your pension to repay the mortgage whilst you are still working is currently considered a bad thing to do unless there is good justification for doing so.    Your pension is likely to be earning you around 5-7% p.a. average over the long term.  Your mortgage interest rates are likely to be at least half that.     So, doing this would reduce your funds in retirement, blow your 25% on that chunk in one go instead of being utilised over your retirement and only result in reducing your net worth.

There can be justifications for doing it.   But if its just a case of thinking that being mortgage free is better then its likely to be wrong.  That said, there is a scenario where it could be better seeing as you are a higher rate tax payer but it would involve you putting all the money you save in the mortgage back into the pension.

SWB

@Albermarle Thankyou so much for your help.
 The figures of 100k pot was an example and my pot is a lot more. I would like to withdraw as little as I need as my workplace pension allows me to retire at 60yrs with no reduction for retiring early.
Does the above mean that I could take 15k drawdown to pay off my mortgage and then take another 10k one/two years later if required? (All tax free?) I pay 40% tax so trying to be as tax efficient as I can. Thanks

Albermarle

SWB said:

@Albermarle Thankyou so much for your help.
 The figures of 100k pot was an example and my pot is a lot more. I would like to withdraw as little as I need as my workplace pension allows me to retire at 60yrs with no reduction for retiring early.
Does the above mean that I could take 15k drawdown to pay off my mortgage and then take another 10k one/two years later if required? (All tax free?) I pay 40% tax so trying to be as tax efficient as I can. Thanks

This info is a bit confusing ;
All my and ( Dunstonh) comments have assumed you have a DC ( defined contribution ) pension with a pot of money . You can start to take from these pensions ( if you wish ) from age 55 .
However you are saying that you have a fixed date from your employer ? when you can take your pension , with no reduction for retiring early. This  would indicate that in fact you have a DB ( defined benefit/final salary ) pension that gives you a guaranteed annual income . In which case all previous comments are null and void. 

Dox

SWB said:

@Albermarle Thankyou so much for your help.
 The figures of 100k pot was an example and my pot is a lot more. I would like to withdraw as little as I need as my workplace pension allows me to retire at 60yrs with no reduction for retiring early.
Does the above mean that I could take 15k drawdown to pay off my mortgage and then take another 10k one/two years later if required? (All tax free?) I pay 40% tax so trying to be as tax efficient as I can. Thanks

Are you saying you have a defined benefit company pension scheme, and the 'pot' you refer to is a defined contribution arrangement, in addition to and separate from the DB scheme?

SWB

My apologies, I haven’t been clear. It looks like I have a Defined Benefit pension. My company is changing this to a Defined Contribution this year. 
I am 55 in a few days, my salary is £50k and due to my ignorance, I have been paying 40% tax on my annual bonuses. I will be adding this years £10k bonus into my pension pot so I don’t pay 40%. 
My pension changes from DB to DC this year and I was thinking about withdrawing sufficient to pay off my mortgage, but keep working and I can see the disadvantages you have mentioned, thankyou. I will probably not go down this route yet. 
Can someone help me understand the 25% tax free though please?
If my DB pension pot is 100k, can I take 25k tax free at any time? (Or do I pay tax on 75% of this 25k?)
Can I take 15k tax free this year, then 10k tax free the year after?
Many thanks for any help, appreciated. 

SWB

Dox said:

SWB said:

@Albermarle Thankyou so much for your help.
 The figures of 100k pot was an example and my pot is a lot more. I would like to withdraw as little as I need as my workplace pension allows me to retire at 60yrs with no reduction for retiring early.
Does the above mean that I could take 15k drawdown to pay off my mortgage and then take another 10k one/two years later if required? (All tax free?) I pay 40% tax so trying to be as tax efficient as I can. Thanks

Are you saying you have a defined benefit company pension scheme, and the 'pot' you refer to is a defined contribution arrangement, in addition to and separate from the DB scheme?

Dox, I have one pension of ‘100k’
It is a Defined Benefit pension.
Apologies, I have left it very late to start learning about pensions!
My current DB pension finishes shortly and my new DC pension replaces it. This has prompted me to start learning ☹️
Many thanks 

Dazed_and_C0nfused

There isn't a "pot" with a DB pension.  That is a key element you need to understand.

A DB pension is a promise to pay £x/year, usually based on length of service and final salary or average earnings across your career.

Any tax free lump sum on a DB pension is payable in accordance with the rules of the scheme and can vary from scheme to scheme.

For example it may be 3 x your annual DB pension.  Or there may not be a TFLS.  Or you may get to choose how much TFLS you want (within certain limits) in return for a reduced DB pension.

But you need to read the scheme rules to see what applies to you.

Being 55 is probably pretty irrelevant as well as the scheme rules will set a normal retirement age which is when you would normally get your pension (and any TFLS).

The options you are talking about, particularly access at 55, are applicable to a DC pension. 

SWB

Thankyou, that helps.
I assumed that my ‘pension transfer total’ was a ‘pot’.
I have a work calculator that shows that I can take 25% at aged 55.
I can take ‘25k’ and have a reduced pension so I assumed it was the same.
Would this 25% be tax free?
Thanks 

Dazed_and_C0nfused

Does your work calculator relate to your DB pension or the new DC pension?

If you take a TFLS from a DB pension then the pension itself usually has to start payment at the same time and at age 55 that is likely to come with a large actuarial reduction.  

Do you want to start your DB pension i.e. receive monthly (taxable) payments or are you under the impression that you can access a TFLS from your DB pension without starting to receive the pension? 

If the latter can you post the an extract from the scheme rules which confirm that this is possible as it would be highly unusual.

I suspect you are getting rules for the DB and DC pensions mixed up.