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25% TFLS - what happens to the 75%

23 replies 1.3K views
I'm unclear on the pension rules around the tax free lump sum.

Say my pot is £400k - I thought I could simply take £100k tax free and leave £300k in the pension wrapper to take later.

However,  on the Gov website it says:

Example:
Your whole pension is worth £60,000. You take £15,000 tax-free. Your pension provider takes tax off the remaining £45,000.



So in my example, I get £100k tax free and the remaining £300k is taxed - but at what rate? If I'm not working and this is my only income, is it all taxed at the basic rate, or is it like salary and £50k is taxed at 20%, £100k at 40% and the remainder at 45%?

If so, do I essentially now have £282.5k outside the pension wrapper? (I.e. £100k + (£50k @ 80%) + (£100k @ 60%) + (£150k @ 55%)

I  had thought I'd be able to take £100k tax free, leave the £300k within the pension wrapper and take £12.5k tax free each year but it appears I"ve misunderstood things, so any clarification would be greatly appreciated.
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Replies

  • Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    You have misinterpreted things.

    If you take the 25% TFLS upfront (not always the best thing to do,) then the remaining 75% is taxable.  When you take it out of the pension pot.

    So if you leave the remaining £300k in the pension there is no tax to pay.

    If you then took £20k then that is part of your taxable income of the tax year you take the £20k.  The exact amount of tax will depend what other income you have in that tax year.
  • DoctorStrangeDoctorStrange Forumite
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    Thanks - that's what I originally thought but then I saw Martin's "Swiss roll" analogy which suggested you can't take the "jam" without the "roll" and confused myself. 

    Thanks for clarifying so quickly 
  • Tony69Tony69 Forumite
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    You have misinterpreted things.

    If you take the 25% TFLS upfront (not always the best thing to do,) then the remaining 75% is taxable.  When you take it out of the pension pot.

    So if you leave the remaining £300k in the pension there is no tax to pay.

    If you then took £20k then that is part of your taxable income of the tax year you take the £20k.  The exact amount of tax will depend what other income you have in that tax year.
    If the £12.5k is the only income in that tax year would there still be tax to pay?
    never chew the umbilical cord!!
  • bownyboybownyboy Forumite
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    Tony69 said:
    If the £12.5k is the only income in that tax year would there still be tax to pay?
    No tax to pay if under your personal allowance. 
    early retirement wannabe
  • Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    Tony69 said:
    You have misinterpreted things.

    If you take the 25% TFLS upfront (not always the best thing to do,) then the remaining 75% is taxable.  When you take it out of the pension pot.

    So if you leave the remaining £300k in the pension there is no tax to pay.

    If you then took £20k then that is part of your taxable income of the tax year you take the £20k.  The exact amount of tax will depend what other income you have in that tax year.
    If the £12.5k is the only income in that tax year would there still be tax to pay?
    Not if it was covered by your Personal Allowance.  Which will be either £12,500 or £11,250 (if applied for Marriage Allowance)
  • zagfleszagfles Forumite
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    Thanks - that's what I originally thought but then I saw Martin's "Swiss roll" analogy which suggested you can't take the "jam" without the "roll" and confused myself. 

    Thanks for clarifying so quickly 
    That wasn't well explained IMO. There's a thread about that show here. He did then explain you can take the jam later, or was it the roll... If you go into drawdown you can take the 25% tax free and leave the rest in the drawdown pension, and you're taxed when you take it out.
  • dunstonhdunstonh Forumite
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    Say my pot is £400k - I thought I could simply take £100k tax free and leave £300k in the pension wrapper to take later.
    Do you plan on spending that £100k tax free immediately?
    Most people are better off not taking it up front but phased.
    However,  on the Gov website it says:

    Example:
    Your whole pension is worth £60,000. You take £15,000 tax-free. Your pension provider takes tax off the remaining £45,000.
    That is what happens on UFPLS.  Not drawdown.
    I  had thought I'd be able to take £100k tax free, leave the £300k within the pension wrapper and take £12.5k tax free each year but it appears I"ve misunderstood things, so any clarification would be greatly appreciated.
    How about taking the 25% tax free as income?  It will give you £4k a year more tax free whilst still leaving 25% tax free available on the pension remaining, should you ever need it.

    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • DoctorStrangeDoctorStrange Forumite
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    zagfles said:
    Thanks - that's what I originally thought but then I saw Martin's "Swiss roll" analogy which suggested you can't take the "jam" without the "roll" and confused myself. 

    Thanks for clarifying so quickly 
    That wasn't well explained IMO. There's a thread about that show here. He did then explain you can take the jam later, or was it the roll... If you go into drawdown you can take the 25% tax free and leave the rest in the drawdown pension, and you're taxed when you take it out.
    Is there a process for "going into drawdown"?

    In my head, I've simply got a SIPP and I was going to leave the 75% invested in whatever funds are appropriate at the time,  making withdrawals as needed i.e. treating the SIPP much like any other savings account (except paying tax on withdrawals above the TFA).

    I'm not sure if that's what they mean by  "going into drawdown" or if there's a more formal process one must do e.g. switch from a SIPP to a separate kind of product / "drawdown account"?



  • MarconMarcon Forumite
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    zagfles said:
    Thanks - that's what I originally thought but then I saw Martin's "Swiss roll" analogy which suggested you can't take the "jam" without the "roll" and confused myself. 

    Thanks for clarifying so quickly 
    That wasn't well explained IMO. There's a thread about that show here. He did then explain you can take the jam later, or was it the roll... If you go into drawdown you can take the 25% tax free and leave the rest in the drawdown pension, and you're taxed when you take it out.
    Is there a process for "going into drawdown"?

    In my head, I've simply got a SIPP and I was going to leave the 75% invested in whatever funds are appropriate at the time,  making withdrawals as needed i.e. treating the SIPP much like any other savings account (except paying tax on withdrawals above the TFA).

    I'm not sure if that's what they mean by  "going into drawdown" or if there's a more formal process one must do e.g. switch from a SIPP to a separate kind of product / "drawdown account"?



    If you look on your SIPP provider's website and search on 'drawdown', that should give you all the info you need.
  • AlbermarleAlbermarle Forumite
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    I'm not sure if that's what they mean by  "going into drawdown" or if there's a more formal process one must do e.g. switch from a SIPP to a separate kind of product / "drawdown account"?
    Some older pensions do not offer drawdown as an option , so you would have to switch to one that does .
    With a more modern pension , they will offer it but you will have to communicate with them as to what you want to do . So I suppose you would say you wanted to go into drawdown and they will explain what will happen ( or explain on their website as suggested above) 


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