Filling the gap tax efficiently

Brenster

Can someone advise if this would work, am using hyperthetical numbers for ease, please ignore any growth, inflation etc for the purposes of this question.  

Age 57 can access Private Pension, Pot Value £500k, take 25% tax free > £125k leavin £375k in the pot

I would use £20k per year from my tax free amount to fund the next 6 years living costs.

Am i able to 'draw' the maximum tax free amount of circa £10k per year from my remaining pot (saying £10k for ease, i realise it is closer to £9k), for these 6 years, which would then equate to circa £60k, and allow for a further 3 years of expenditure (at £20k per year) before increasing drawdown into the 'taxable bracket'.

Is my understanding of this correct ? 
  

MaxiRobriguez

If you take the money out in chunks then you only get 25% tax free of the chunk, not the entire pot. 

Your £125k drawdown would result in a net, after tax, sum of £82k.

It would make far more sense to only take the money you need each year. If you need £20k to live, you only need to take out £22k. 

xylophone

Are you planning to do no paid work at all from age 57?

Are you expecting to draw a DB pension at age 63?

Have you obtained a state pension forecast?

ErinGoBrath

MaxiRobriguez said:

If you take the money out in chunks then you only get 25% tax free of the chunk, not the entire pot. 

Your £125k drawdown would result in a net, after tax, sum of £82k.

It would make far more sense to only take the money you need each year. If you need £20k to live, you only need to take out £22k. 

The £125k is tax free cash. No tax due.

The OP can then draw down the tax free allowance of £12,570 per year from the remaining pot without having to pay tax (subject to other taxable income of course).

Brenster

ErinGoBrath said:

MaxiRobriguez said:

If you take the money out in chunks then you only get 25% tax free of the chunk, not the entire pot. 

Your £125k drawdown would result in a net, after tax, sum of £82k.

It would make far more sense to only take the money you need each year. If you need £20k to live, you only need to take out £22k. 

The £125k is tax free cash. No tax due.

The OP can then draw down the tax free allowance of £12,570 per year from the remaining pot without having to pay tax (subject to other taxable income of course).

Thanks you for this, exactly the clarification i was after

jamesd

Yes, you can do what I think you described:

1. Take benefits from the whole 500k, 125k as a tax free lump sum, the rest placed into a taxable flexi-access drawdown pot.
2. Draw taxable money from the flexi-access drawdown pot to use your full income tax personal allowance every year, so you get out more with no tax cost and don't waste your use it or lose it personal allowance. £12,570 a year.

This might involve drawing more taxable money from the drawdown pot than you spend, just invest the extra in a stocks and shares ISA until you want to use it.

You want 20k a year and with 12,570 personal allowance that's 12,570 taxable desired. To get that you also get the other 25% tax free, another 4,190. That's 16,760 total, short of your 20k target. Take another 3,240 tax free to hit the target and the 3/4 taxable part of that adds  9,720 to the flexi-access drawdown pot that you just leave alone. So in this case you'd be taking benefits from 16,760 + 3,240 + 9,720 = 29,720 a year. Ignoring growth and other factors you could do this for 16.8 years.

You can do a bit better than that. Also take 20k tax free to put into a stocks and shares ISA, adding another 60k a year of untouched money to the flexi-access drawdown pot. This takes total benefits of 109,720 a year which you can only do for almost five years, but it accumulates growth in the ISA not the pension, so you'll probably get out more tax free. After the almost five years you switch to the ISA for the tax free top up above the income tax personal allowance.

Don't forget to pay in 2880 net grossed up to 3600. Even when withdrawn with basic rate tax due you make 180 on the deal. This means another 2880 * 4 = 11,520 a year of benefits to take from the 500k so you do it with tax free money.

Brenster

jamesd said:

Yes, you can do what I think you described:

1. Take benefits from the whole 500k, 125k as a tax free lump sum, the rest placed into a taxable flexi-access drawdown pot.
2. Draw taxable money from the flexi-access drawdown pot to use your full income tax personal allowance every year, so you get out more with no tax cost and don't waste your use it or lose it personal allowance. £12,570 a year.

This might involve drawing more taxable money from the drawdown pot than you spend, just invest the extra in a stocks and shares ISA until you want to use it.

You want 20k a year and with 12,570 personal allowance that's 12,570 taxable desired. To get that you also get the other 25% tax free, another 4,190. That's 16,760 total, short of your 20k target. Take another 3,240 tax free to hit the target and the 3/4 taxable part of that adds  9,720 to the flexi-access drawdown pot that you just leave alone. So in this case you'd be taking benefits from 16,760 + 3,240 + 9,720 = 29,720 a year. Ignoring growth and other factors you could do this for 16.8 years.

You can do a bit better than that. Also take 20k tax free to put into a stocks and shares ISA, adding another 60k a year of untouched money to the flexi-access drawdown pot. This takes total benefits of 109,720 a year which you can only do for almost five years, but it accumulates growth in the ISA not the pension, so you'll probably get out more tax free. After the almost five years you switch to the ISA for the tax free top up above the income tax personal allowance.

Don't forget to pay in 2880 net grossed up to 3600. Even when withdrawn with basic rate tax due you make 180 on the deal. This means another 2880 * 4 = 11,520 a year of benefits to take from the 500k so you do it with tax free money.

Wow, you are all over it ! Very informative, thank you.

Dansmam

Brenster said:

jamesd said:

Yes, you can do what I think you described:

1. Take benefits from the whole 500k, 125k as a tax free lump sum, the rest placed into a taxable flexi-access drawdown pot.
2. Draw taxable money from the flexi-access drawdown pot to use your full income tax personal allowance every year, so you get out more with no tax cost and don't waste your use it or lose it personal allowance. £12,570 a year.

This might involve drawing more taxable money from the drawdown pot than you spend, just invest the extra in a stocks and shares ISA until you want to use it.

You want 20k a year and with 12,570 personal allowance that's 12,570 taxable desired. To get that you also get the other 25% tax free, another 4,190. That's 16,760 total, short of your 20k target. Take another 3,240 tax free to hit the target and the 3/4 taxable part of that adds  9,720 to the flexi-access drawdown pot that you just leave alone. So in this case you'd be taking benefits from 16,760 + 3,240 + 9,720 = 29,720 a year. Ignoring growth and other factors you could do this for 16.8 years.

You can do a bit better than that. Also take 20k tax free to put into a stocks and shares ISA, adding another 60k a year of untouched money to the flexi-access drawdown pot. This takes total benefits of 109,720 a year which you can only do for almost five years, but it accumulates growth in the ISA not the pension, so you'll probably get out more tax free. After the almost five years you switch to the ISA for the tax free top up above the income tax personal allowance.

Don't forget to pay in 2880 net grossed up to 3600. Even when withdrawn with basic rate tax due you make 180 on the deal. This means another 2880 * 4 = 11,520 a year of benefits to take from the 500k so you do it with tax free money.

Wow, you are all over it ! Very informative, thank you.

If I'd asked the same question 10 years ago  I could have packed in work 5 years earlier. They're a bright and helpful bunch on here. Thank you @jamesd

Albermarle

Brenster said:

jamesd said:

Yes, you can do what I think you described:

1. Take benefits from the whole 500k, 125k as a tax free lump sum, the rest placed into a taxable flexi-access drawdown pot.
2. Draw taxable money from the flexi-access drawdown pot to use your full income tax personal allowance every year, so you get out more with no tax cost and don't waste your use it or lose it personal allowance. £12,570 a year.

This might involve drawing more taxable money from the drawdown pot than you spend, just invest the extra in a stocks and shares ISA until you want to use it.

You want 20k a year and with 12,570 personal allowance that's 12,570 taxable desired. To get that you also get the other 25% tax free, another 4,190. That's 16,760 total, short of your 20k target. Take another 3,240 tax free to hit the target and the 3/4 taxable part of that adds  9,720 to the flexi-access drawdown pot that you just leave alone. So in this case you'd be taking benefits from 16,760 + 3,240 + 9,720 = 29,720 a year. Ignoring growth and other factors you could do this for 16.8 years.

You can do a bit better than that. Also take 20k tax free to put into a stocks and shares ISA, adding another 60k a year of untouched money to the flexi-access drawdown pot. This takes total benefits of 109,720 a year which you can only do for almost five years, but it accumulates growth in the ISA not the pension, so you'll probably get out more tax free. After the almost five years you switch to the ISA for the tax free top up above the income tax personal allowance.

Don't forget to pay in 2880 net grossed up to 3600. Even when withdrawn with basic rate tax due you make 180 on the deal. This means another 2880 * 4 = 11,520 a year of benefits to take from the 500k so you do it with tax free money.

Wow, you are all over it ! Very informative, thank you.

Only to add that it would be worthwhile to check with your pension provider what is possible to do in practice . Some are more flexible than others . For example an older pension may only be able to pay the full 25% tax free in one hit ( and may not even support drawdown at all) Whilst another one maybe let you take out the 25% tax free in stages .
Or if you want to take tax free and taxable money at the same time , they may only offer UFPLS payments ( which maybe fine for you ) 

Retireinten

jamesd said:

Yes, you can do what I think you described:

1. Take benefits from the whole 500k, 125k as a tax free lump sum, the rest placed into a taxable flexi-access drawdown pot.
2. Draw taxable money from the flexi-access drawdown pot to use your full income tax personal allowance every year, so you get out more with no tax cost and don't waste your use it or lose it personal allowance. £12,570 a year.

This might involve drawing more taxable money from the drawdown pot than you spend, just invest the extra in a stocks and shares ISA until you want to use it.

You want 20k a year and with 12,570 personal allowance that's 12,570 taxable desired. To get that you also get the other 25% tax free, another 4,190. That's 16,760 total, short of your 20k target. Take another 3,240 tax free to hit the target and the 3/4 taxable part of that adds  9,720 to the flexi-access drawdown pot that you just leave alone. So in this case you'd be taking benefits from 16,760 + 3,240 + 9,720 = 29,720 a year. Ignoring growth and other factors you could do this for 16.8 years.

You can do a bit better than that. Also take 20k tax free to put into a stocks and shares ISA, adding another 60k a year of untouched money to the flexi-access drawdown pot. This takes total benefits of 109,720 a year which you can only do for almost five years, but it accumulates growth in the ISA not the pension, so you'll probably get out more tax free. After the almost five years you switch to the ISA for the tax free top up above the income tax personal allowance.

Don't forget to pay in 2880 net grossed up to 3600. Even when withdrawn with basic rate tax due you make 180 on the deal. This means another 2880 * 4 = 11,520 a year of benefits to take from the 500k so you do it with tax free money.

I'm another one who is very thankful to  people like JamesD that contribute to this forum.  I am financially significantly better off as a direct result of the knowledge I have gained from these threads. 



I have some years to go before drawdown, but has anyone found a  'Drawdown for Idiots' guide that may be of use to those of us still trying to get our heads round drawdown options and crystallised and uncrystalised pots etc? 



Also I had ruled out the £2880/£3600 thing as I hadn't realised it still benefits if we are basic rate taxpayers in retirement. 



Six years of loitering on the pensions forum and I'm still learning.... 

zagfles

jamesd said:

Yes, you can do what I think you described:

1. Take benefits from the whole 500k, 125k as a tax free lump sum, the rest placed into a taxable flexi-access drawdown pot.
2. Draw taxable money from the flexi-access drawdown pot to use your full income tax personal allowance every year, so you get out more with no tax cost and don't waste your use it or lose it personal allowance. £12,570 a year.

This might involve drawing more taxable money from the drawdown pot than you spend, just invest the extra in a stocks and shares ISA until you want to use it.

You want 20k a year and with 12,570 personal allowance that's 12,570 taxable desired. To get that you also get the other 25% tax free, another 4,190. That's 16,760 total, short of your 20k target. Take another 3,240 tax free to hit the target and the 3/4 taxable part of that adds  9,720 to the flexi-access drawdown pot that you just leave alone. So in this case you'd be taking benefits from 16,760 + 3,240 + 9,720 = 29,720 a year. Ignoring growth and other factors you could do this for 16.8 years.

You can do a bit better than that. Also take 20k tax free to put into a stocks and shares ISA, adding another 60k a year of untouched money to the flexi-access drawdown pot. This takes total benefits of 109,720 a year which you can only do for almost five years, but it accumulates growth in the ISA not the pension, so you'll probably get out more tax free. After the almost five years you switch to the ISA for the tax free top up above the income tax personal allowance.

Don't forget to pay in 2880 net grossed up to 3600. Even when withdrawn with basic rate tax due you make 180 on the deal. This means another 2880 * 4 = 11,520 a year of benefits to take from the 500k so you do it with tax free money.

Why do you think that gets you more?