Please check my workings out - DC drawdown and tax

AlanP_2

My last day in employment is Tuesday 31st August (leaving my DB deferred) and I now need to inform my DC pension provider of how much I want to drawdown. I've run my s/sheet and arrived at some numbers but I'd just like a 2nd (or more) opinion please.


Taxable income from employment this year = £3,800 (I have been topping up my AVC).

I plan to take a UFPLS of £62,000

TFLS = £15,500 

Taxable = £46,500 (which will be taxed at Emergency Rate I guess and based on the assumption that I am taking this much each month), which added to my employment income = £53,350

Personal Allowance = £12,880 this year

So tax will be due on £37,470, which should be just within the 20% BR band


Have I got that right, or have I missed something?




Additional questions:

Which form do I need to fill in to reclaim the overpaid tax (this will be the only withdrawal this year)?

Would it be better to spread the UFPLS withdrawals across the remaining 7 months or is it neither here nor there?


Thanks

Notepad_Phil

Personally I'd take just enough in the first payment so that you didn't actually pay any tax or at least paid very little, e.g. a UFPLS of £1500 would mean emergency tax of £15.50, then wait a few days for the hmrc to get a record of the payment and then get the relevant tax code set to the right figure so that you can get the rest of your money out over the rest of the year at the right rate - this assumes you have access to savings and don't need a big UFPLS straight away.

I've not checked your actual figures as I'm just on the way out, but are you claiming for the extra marriage allowance?

tacpot12

I think you have missed something - the emergency tax rate assumes you need to be taxed on £62,000 per month (or £744,000 per year!); you are massivly into the 45% tax band! . So you will pay about £26,000 tax on the  payment, but be able to claim some of this back.

It would be much better to take the UFPLS payments as 8 payments of £7,750.  £1937.50 of the payment will be tax free, and the remaining £5812.50 taxed. (The emegency tax code will assume you need to be taxed on about £46K of income, and with your personal allowance, you will be in the 20% tax bracket).

One final question for you. Have you understood that by taking your DC pension as UFLPS payments you are triggering the Money Purchase Annual Allowance reduction to £4000 per year? The impact of this is that it would prevent you putting more than £4000 (per year) back into your pension in future? You might want to do this if you were still able to do some work and came into an inheritance or downsized. If you are happy that you won't want to put any significant amount of money back into your pension, UFPLS is fine. If there is a chance you might want to put a significant amount of money back into your pension, you might want to consider if just taking the tax free money out would be sufficient for your needs. Once you take taxable money out, you trigger the MPAA reduction.   

tacpot12

I've just see Notepad_phil's post. His suggestion is valid, as once you take a taxable payment, your pension provider will (should) receive a tax code for you, and then you are no longer taxed as though the payments would be repeated every month until the end of the  tax year. You will be taxed only on the payments that are actually made. 

The "should" in brackets above is important. If you take a payment before HMRC have sent your pension scheme a tax code, you will be taxed on the emergency basis.  

AlanP_2

Thanks all.


I did wonder whether monthly payments might be better than a big "one off" so will probably go with that for this tax year. I make that 7 payments (September to March) of say £8900 gross per month = £62,300 which still keeps me just under BR level.

For next tax year (22/23) I can set it to £5,585 pm = £67,020 pa, again just under BR level.

Marriage allowance isn't relevant as my wife will continue to work and is a HR taxpayer.

I'm aware of the MPAA but won't be working so no relevant income hence limited to £3600 pension contributions in future tax years anyway.


In case anybody was wondering why on earth we need that much, we have a plan to live off this, maximise my wife's AVC and SIPP contributions and put the rest in to PBs and ISAs as part of the longer term portfolio plan. With the tax relief my wife will receive all of my withdrawals will be "tax free" overall, and this can only be done whilst she is working.

jamesd

Instead of one large UFPLS payment, how about taking one PCLS (tax free lump sum) and then spreading the remainder taxable drawing from the 75% in the flexi-access drawdown account monthly? That will start out with high tax but when you get a tax code allocated you'll get refunds added to the remaining monthly payments. So long as you're happy to receive the refund via the pension PAYE there will be no need to claim.

If you check your online tax account, as soon as you see the pension provider there you can update HMRC with your real expected income from that source, and from employment, for the whole year. Pension should be accurate already if you do it as I suggest.

AlanP_2

Thanks James, that's certainly worth thinking about as some of the money being invested outside my DC will be used to buy ITs as on our platform it is better to make larger purchases rather than monthly contributions to those.

Same net effect over the year but front-loads receipt of the cash.

Albermarle

Other threads have indicated that taking regular UFPLS payments can be a bit of an administrative chore .
Some ( most?) platforms seem to insist on treating each one as a new payment, and meaning you have to go all through the process of talking to them, and listen to all the warnings about do you really understand what you are doing, filling forms  etc 
I think the way Jamesd suggests is probably simpler and will only need to be set up once.