Does this make sense?

markythesparky1

I am 59 years old and have a small private pension in my portfolio. I currently have well over £10k of my tax allowance unused every year and in order to reduce the amount of tax I pay, wondered if the following appeared sensible to those of you that are far wiser and money-savvy than I.  My pension is currently worth around £36k and my plan is - by means of a Flexible Income Policy - take the tax free 25% = £9k plus another £9k this tax year, then £9k the next tax year and £9k the following year. My questions are: 1. Does my idea seem reasonable? 2. Are there any foreseeable drawbacks apart from charges from my pension provider? 3. Am I correct in assuming that apart from the 25% tax free lump sum, my pension provider will deduct the relevant tax from the remaining 75% of the pot and I will have to claim it back from HMRC at the end of each financial year?  Thanks, I really appreciate any help you can provide.

Dazed_and_C0nfused

1.  Other than wondering what you are living on your plan would work just fine.

But I don't understand how this can be true?

in order to reduce the amount of tax I pay,

If you have much unused Personal Allowances why are you paying tax??

2.  Lack of pension provision for the rest of you life but there may be plenty you haven't told us.

3.  All depends how you take the taxable element.  There is no need to pay any tax if you don't want to.

Are you married?

tacpot12

If the taxable portion of your pension drawdown is below your personal allowance, the pension provider can use your tax code to determine that they don't need to make any deduction of tax - this would avoid you having to reclaim it. However, if you take £9K out as a lump sum on April 6th, the pension provider is obliged to assume you will do this every month, and so you will be taxed as though your income was going to c £108,000 a year! This will result in having to claim tax back. The way around this is to take the money out as a monthly sum (£750 pcm). You will pay no tax if you  have a tax free amount of £9K and take out £750 pcm that is taxable. 

zagfles

Or you could do it as 3x £12k UFPLS over the 3 years. £9k would be taxable but covered by your PA and the other £3k would be tax free. Or as above, whatever suits you. You'll need to check what options your pension provider offres, you might need to transfer it somewhere else. Be very careful if you're claiming benefits as it might affect them.  

Albermarle

 I currently have well over £10k of my tax allowance unused every year and in order to reduce the amount of tax I pay,

As mentioned above, this does not make sense,

NottinghamKnight

It may be that the OP is aware that tax would be due on 75% of a withdrawal of the whole sum, and is working out how to avoid this by spreading out over multiple tax years, ie reducing the amount of potentially paying tax.
For people with o income then the sweet spot of withdrawal is to tax the tax allowance plus 25%, the latter being tax free; if your income is currently £2,500 a year then this is the same allowing for that income.  

markythesparky1

Absolutely gobsmacked by the amazing response within such a short space of time. Thank you everyone - very much! Just to clarify a couple of points: I have enough additional investments/savings to finance myself for the forseeable future. NottinghamKnight was spot on explaining my little ambiguity: I have a 12.5K tax allowance and only  £2.5k of that allowance is taken with interest on savings etc., which leaves around  £10k p/a. Hopefully by spreading my payments over 3 years, rather than take it all at once, I can 'donate' a little less money to the taxman.

Dazed_and_C0nfused

You have completely misunderstand how your tax liability is calculated.

You can take £12,500 taxable pension income and not have any tax to pay.

Your £2,500 interest on savings would then be taxed but it would be taxed at the savings starter rate of tax.  Which is 0%.

Unless you have relatively unusual circumstances pension income is always first in the order income is taxed i.e. that uses your Personal Allowances first.

And just for the avoidance of doubt you are one of the people who cannot make use of the savings nil rate of tax (aka Personal Savings Allowance), simply because you do not have sufficient income to be able to use it.

You would need another £2,501 interest before it was of any use (assuming pension income of £12,500).

markythesparky1

Dazed_and_C0nfused said:

You have completely misunderstand how your tax liability is calculated....

Excellent point about the starter rate for savings. Had absolutely no idea of this additional allowance. Thank you very much for bringing it to my attention.

Dazed_and_C0nfused

markythesparky1 said:

Dazed_and_C0nfused said:

You have completely misunderstand how your tax liability is calculated....

Excellent point about the starter rate for savings. Had absolutely no idea of this additional allowance. Thank you very much for bringing it to my attention.

It doesn't alter the fact you have £36k to move from a pension to you but it might change the period you take the taxable element over.