Drawdown etc

Organgrinder

Hopefully a quick one.

I've got roughly £50,000 in DC plans. I was thinking of taking the 25% tax free at 55. Basically for some home improvements, pay off a car loan etc. My DB's are more than adequate for my retirement needs.

My question is this. If I were to drawn down the remainder over say 8 years I pay 20% tax. (It won't push me into the higher band). So can I reinvest this into another fund and get that tax back? If so am I then eligible for another 25% tax free lump sum from that pension? 

So are ISA's something to consider? I've got roughly £3,500 a year I can invest.

Malthusian

My question is this. If I were to drawn down the remainder over say 8 years I pay 20% tax. (It won't push me into the higher band). So can I reinvest this into another fund and get that tax back?

No. By drawing the taxable income in that way you would trigger the Money Purchase Annual Allowance and would only be able to pay £4,000 a year into a pension. That leaves £687.50 each year you would be stuck with. And to make pension contributions of £4,000 a year you would need earned income of that amount. (But you can pay up to £3,600 gross into a pension, £2,880 net, regardless of earned income.)

Are you still working and paying pension contributions?

If so am I then eligible for another 25% tax free lump sum from that pension?

Yes. There are no rules against recycling taxed pension income back into a pension - except that the Money Purchase Annual Allowance drastically restricts the amount you can recycle, to the point that most people don't bother. (And if your earned income is under £4,000pa that will restrict it further.)

So are ISA's something to consider?

Not for that reason. Why pay tax to take money out of one tax-free wrapper just to put it in another?

dunstonh

My question is this. If I were to drawn down the remainder over say 8 years I pay 20% tax. (It won't push me into the higher band). So can I reinvest this into another fund and get that tax back? If so am I then eligible for another 25% tax free lump sum from that pension? 

Drawing a penny of the crystallised fund (the 75% bit after you have taken the 25%) will trigger the MPAA which reduces your annual pension contribution allowance to just £4000.  If you are still working, that could force you to opt out of your workplace pension.

What justification are you thinking of to believe it is sensible to draw the 75%, pay tax and then pay it back into a pension or an ISA?   

jamesd

You're eligible for at least 25% added to your pension contributions and yes you can reinvest pension income into new contributions. Also, within limits, pension tax free lump sum money. Yes, you can then take 25% tax free from this reinvested money and repeat as desired.

You might not be able to do what you plan because from the moment you take the taxable money from the 75% in flexi-access drawdown you are subject to the money purchase annual allowance of 4k of pension contributions each tax year. Taking a UFPLS payment also triggers the MPAA.

Taking the 25% tax free doesn't trigger that. Taking a small pot payment of up to 10k from a pot that is all of the money in the pot also doesn't trigger it and can be done up to three times in your lifetime, you're allowed to move money to create the pot, the payment is 25% tax free and 75% taxable.

Taking defined benefit pension income doesn't trigger the MPAA and there aren't any restrictions on reinvesting this in pension contributions.

Throughout your contributions must remain within your pay limit (gross personal contributions no more than gross pay) and the annual allowance (40k, or reduced to 4k MPAA plus DB at whatever level) or pay the annual allowance charge.

You can withdraw 7.5k tax free from a pension every rolling twelve months (not tax or calendar year) and reinvest any part of that in new pension contributions. There are potentially less restrictive limits but this is the easiest one.

So for DC you could use the small pot rule once or maybe twice in a single tax year and in a second tax year, whatever is tax efficient and in addition take 25% tax free lump sum from the rest of the pot, without triggering the MPAA.

Forget about ISA investing. In the circumstances you've described your money should be going into pension contributions, not ISAs. If you have ISA money you should be moving it into pensions as fast as you're able. Since you've reached 55 the pension money in DC pots is now readily accessible with no more than a few weeks of paperwork and getting that 25% at least tax relief added (to deliver 20% basic rate tax relief) delivers an initial bit of supercharging that the conventional ISA route can't match.

ISA investing comes into the picture again if you're withdrawing more from a pension than you're able to spend or reinvest in new pension contributions. You use the ISA as first choice to soak up the excess.

Organgrinder

Ok thanks. So basically i take take 25% in January when I hit 55 without triggering anything else?

So for the remaining £40k or so I can leave it? Or take small tax free lumo sums each year?

Albermarle

Organgrinder said:

Ok thanks. So basically i take take 25% in January when I hit 55 without triggering anything else?

So for the remaining £40k or so I can leave it? Or take small tax free lumo sums each year?

25% of £50K is £12,500 , so you would have a bit less than £40K left. As you will have taken the full 25% tax free , no more tax free cash can be taken for what is left.
You could take only part of the tax free cash and then the rest later if you want.

Organgrinder

I'm just rounding!!!

3stones

Albermarle said:

25% of £50K is £12,500 , so you would have a bit less than £40K left. As you will have taken the full 25% tax free , no more tax free cash can be taken for what is left.
You could take only part of the tax free cash and then the rest later if you want.

Would that still be the case if the OP wanted to withdraw £12,5K for the three following years and he had no other form of taxable income during those three years? Surely that 12,5k would be tax free as well.

Only asking as we as i'm planning on retiring at 57 or 58 by doing a very similar thing as the OP. I'm 55 now and going to put  20K  of earnings away this year and next then at 57 or 58 use that money too help bridge the gap to DB's at 60, save taking a 5% hit pa by taking the DB's early.

Albermarle

3stones said:

Albermarle said:

25% of £50K is £12,500 , so you would have a bit less than £40K left. As you will have taken the full 25% tax free , no more tax free cash can be taken for what is left.
You could take only part of the tax free cash and then the rest later if you want.

Would that still be the case if the OP wanted to withdraw £12,5K for the three following years and he had no other form of taxable income during those three years? Surely that 12,5k would be tax free as well.

Only asking as we as i'm planning on retiring at 57 or 58 by doing a very similar thing as the OP. I'm 55 now and going to put  20K  of earnings away this year and next then at 57 or 58 use that money too help bridge the gap to DB's at 60, save taking a 5% hit pa by taking the DB's early.

You are right, but you just have to be a bit careful with the definitions to avoid confusion.

The 25 % tax free amount  is exactly that - totally tax free regardless of your circumstances , other income etc .It does not matter when you take it , or whether you take it all at once or in portions.

The rest is actually taxable, but if you only withdraw £12570 per tax year ,  and you have no other taxable income , then you will not actually have to pay any tax. 

MallyGirl

The £12.5k would be taxed at 0% rather than tax free.

3stones

 Thank you both of you for clarifying that point it really is very helpful for my own planning and hopefully for others too.