Tax Free Drawdown

randomsuccess

Hi all. Long time lurker, first time poster poster, here.

I am just about to start drawing down from my DC pension with Royal London. Starting in next financial year (21/22), my intention is not to pay income tax. Very often I see the figure of £16,760 as a drawdown value for the following tax year. This consists of £12,570 taxable and £4,190 as the 25% tax free amount. However, what I do not understand is my pension plan for the new financial year is to pay me £12,570 taxable and £5,700 tax free. How do I manage to get an extra £1,510 tax free per annum? I have asked my IFA who suggested that I was worrying too much about the details of pensions and all is OK. This is all very well but I need to know in case it effects my ability to contribute the £2,880 to my pension in the future. For info. I don't have any other income apart from income from ISAs and I am four and a half years from SP age.

Dazed_and_C0nfused

However, what I do not understand is my pension plan for the new financial year is to pay me £12,570 taxable and £5,700 tax free. How do I manage to get an extra £1,510 tax free per annum? 

Who devised this plan?

Marcon

randomsuccess said:

How do I manage to get an extra £1,510 tax free per annum? I have asked my IFA who suggested that I was worrying too much about the details of pensions and all is OK. This is all very well but I need to know in case it effects my ability to contribute the £2,880 to my pension in the future. For info. I don't have any other income apart from income from ISAs and I am four and a half years from SP age.

Your IFA's attitude does not impress. How patronising can an adviser get? You are fully entitled to understand what is being suggested and why and if your IFA can't explain it, ask why not. I'd like to know too! I suspect they are suggesting you take a nibble of extra tax free cash from the 'untouched' part of your pension pot, but they should be capable of ensuring you understand that.

Better news: it won't impact on your ability to contribute £2,880 (or whatever the prevailing maximum is for those without relevant earnings) and get a 20% tax credit applied to your pension savings to bring it up to £3,600.

randomsuccess

Dazed_and_C0nfused said:

Who devised this plan?

Either Royal London or my IFA or a bit of both.

zagfles

Are they saying you'll get the tax free part £5700 up front as a lump sum, or paid monthly with the pension? If the former, then they probably plan on phased drawdown, crystallising £22800 of your pension, so you get 25% of that tax free leaving £17100 crystallised from which you drawdown your £12570 pa. Then presumably when that runs out after 16 months or so crystallise another chunk.

But that's just a guess. You need to ask them, and why. If your IFA is too patronising or arrogant to explain what he's doing with your money, then I'd be tempted to sack him.

randomsuccess

zagfles said:

Are they saying you'll get the tax free part £5700 up front as a lump sum, or paid monthly with the pension? If the former, then they probably plan on phased drawdown, crystallising £22800 of your pension, so you get 25% of that tax free leaving £17100 crystallised from which you drawdown your £12570 pa. Then presumably when that runs out after 16 months or so crystallise another chunk.

But that's just a guess. You need to ask them, and why. If your IFA is too patronising or arrogant to explain what he's doing with your money, then I'd be tempted to sack him.

Paid monthly. So I get £1,522.50 per month completely tax free, it seems.

zagfles

There are some circumstances where you have a preserved right to tax free cash >25%, but not sure what these are. Think you need answers from your IFA.

Albermarle

The figure of £16,760 , gives you tax free and taxable income exactly in the proportions of 25 to 75.
In this case you could carry on doing this until the pot ran out .
It seems that what will be happening is that your payment will be in a different proportion , say 30 and 70 for the sake of argument .
What that means is that at some point in the future you will have no tax free entitlement left , only taxable , as you will have used up the tax free part at a quicker rate .