Maximising Tax Free Cash in Drawdown

jim8888

Looking at the techzone website, they give the following example of  how to drawdown income from a pension in a tax efficient way:

Ann is 60 and has just retired. She has a SIPP valued at £450,000 but has no other income.

She could take drawdown income of £12,570 completely tax free as it is within her personal allowance.

If Ann doesn't need to take all her tax free cash upfront she could take withdrawals as a combination of taxable income and tax free cash.

This would allow her to take withdrawals of £16,760 tax free (£4,190 TFC and £12,570 income).

What I wondered was where the additional sum of £4,190 comes from? I'm sure I've seen this explained on this forum before, but I've lost the link to it. 

tacpot12

It is one third of her personal allowance. When you add this amount (£4190) to her personal allowance it gives you a figure that you can withdraw from your SIPP tax free. (You can draw 4/3rds of your personal allowance tax free becase 25% of what you withdraw is tax free anyway). 

dunstonh

What I wondered was where the additional sum of £4,190 comes from? I'm sure I've seen this explained on this forum before, but I've lost the link to it. 

Assuming you haven't put the full value of the pension intro drawdown and left some or all uncrystallised, you can draw an income/ad-hoc lump sum made up of 75% taxable and 25% tax free.  The £4190 is the 25% tax free chunk of £16,760.  75% = £12,570 and within the personal allowance and therefore also tax free assuming no other income.

In my experiences, phased flexi-access drawdown is more popular than the drawdown method where 25% is taken up front because it allows for a bigger annual income income tax free whilst still retaining the ability to access 25% later if required.

Albermarle

You need to be clear that you can 

Take 25% of the pension completely tax free, regardless of your personal circumstances or other income .

The remaining 75% is taxable, but you may or may not actually pay tax depending on your personal circumstances , any other taxable income etc 

However you can not take the taxable part , without first taking the tax free part .

So if you take £12570 in taxable income ( but do not pay tax on it if you have no other income ) you are 'forced' to take at least £4190 tax free at the same time.

jim8888

Thanks everyone. I was planning to take £12,750 in the new tax year as drawdown. This would be tax free within my personal allowance and would be my only income. I then planned to top up with tax free money from my TFLS. Let's say I need an annual net income of £30k. My plan was to take  £12,750 drawdown as one payment in April. The rest of the £17,250 would be coming from my TFLS, also as one payment in April, which in effect chyrstalises a chunk of my pension. I'm not too sure how much this chrystalises though, given what has been written above! I'm also not too sure how taking the income monthly or quarterly would work, although I'm sure that could probably be arranged through my SIPP with Fidelity. My thinking was to just take all that I need for the year in April, and then leave the rest alone for a year when I would repeat the process. 

QrizB

jim8888 said:

Let's say I need an annual net income of £30k. My plan was to take  £12,750 drawdown as one payment in April. The rest of the £17,250 would be coming from my TFLS, also as one payment in April, which in effect chyrstalises a chunk of my pension. I'm not too sure how much this chrystalises though, given what has been written above!

If you take £17,250 tax-free, it will crystallise 3x that much of the remaining pension funds - £51,750. If you were to take your £12,750 from that, it would leave £39,000 of crystallised funds in your pension.

jim8888

I did take a small pension TFLS this year, taking the full 25% amount of it - I didn't want to take any drawdown income as I had already used up my personal allowance for this year. That pension was worth £54,342, so I took £13,586 of it as the 25% TFLS. My understanding is that I've chrystalised that pension at £54,342. My intention, in the new tax year, is to then drawdown £12,750 from that remaining pension. I assume that willl initially be taxed, but I will claim that back as per my personal allowance.
The remaining money I need for 2022/23 I will take from the TFLS I have sitting in another pension.....
I think that's how it works?

Albermarle

jim8888 said:

I did take a small pension TFLS this year, taking the full 25% amount of it - I didn't want to take any drawdown income as I had already used up my personal allowance for this year. That pension was worth £54,342, so I took £13,586 of it as the 25% TFLS. My understanding is that I've chrystalised that pension at £54,342. My intention, in the new tax year, is to then drawdown £12,750 from that remaining pension. I assume that willl initially be taxed, but I will claim that back as per my personal allowance.
The remaining money I need for 2022/23 I will take from the TFLS I have sitting in another pension.....
I think that's how it works?

Yes for this small pension  you have crystallised the whole pension of £54,342. You got £13,586 tax free cash and now the remainder( £40,756) is sitting as crystallised funds . Any income taken from this will be taxable .

By the way your personal tax allowance is £12,570 , not £12,750 .

jim8888

"Albermarle said:

jim8888 said:

I did take a small pension TFLS this year, taking the full 25% amount of it - I didn't want to take any drawdown income as I had already used up my personal allowance for this year. That pension was worth £54,342, so I took £13,586 of it as the 25% TFLS. My understanding is that I've chrystalised that pension at £54,342. My intention, in the new tax year, is to then drawdown £12,750 from that remaining pension. I assume that willl initially be taxed, but I will claim that back as per my personal allowance.
The remaining money I need for 2022/23 I will take from the TFLS I have sitting in another pension.....
I think that's how it works?

Yes for this small pension  you have crystallised the whole pension of £54,342. You got £13,586 tax free cash and now the remainder( £40,756) is sitting as crystallised funds . Any income taken from this will be taxable .

By the way your personal tax allowance is £12,570 , not £12,750 .

"Blimey, it was an honest mistake guv"! (me to HMRC next year).

RoadToRiches

dunstonh said:

What I wondered was where the additional sum of £4,190 comes from? I'm sure I've seen this explained on this forum before, but I've lost the link to it. 

Assuming you haven't put the full value of the pension intro drawdown and left some or all uncrystallised, you can draw an income/ad-hoc lump sum made up of 75% taxable and 25% tax free.  The £4190 is the 25% tax free chunk of £16,760.  75% = £12,570 and within the personal allowance and therefore also tax free assuming no other income.

In my experiences, phased flexi-access drawdown is more popular than the drawdown method where 25% is taken up front because it allows for a bigger annual income income tax free whilst still retaining the ability to access 25% later if required.

This will only work if there is no other income though right?  If you had a part time job or state pension or DB pension on top that would have to be taken into account for the tax free amount/pension withdrawal to avoid paying the tax upto the personal allowance.

Albermarle

RoadToRiches said:

dunstonh said:

What I wondered was where the additional sum of £4,190 comes from? I'm sure I've seen this explained on this forum before, but I've lost the link to it. 

Assuming you haven't put the full value of the pension intro drawdown and left some or all uncrystallised, you can draw an income/ad-hoc lump sum made up of 75% taxable and 25% tax free.  The £4190 is the 25% tax free chunk of £16,760.  75% = £12,570 and within the personal allowance and therefore also tax free assuming no other income.

In my experiences, phased flexi-access drawdown is more popular than the drawdown method where 25% is taken up front because it allows for a bigger annual income income tax free whilst still retaining the ability to access 25% later if required.

This will only work if there is no other income though right?  If you had a part time job or state pension or DB pension on top that would have to be taken into account for the tax free amount/pension withdrawal to avoid paying the tax upto the personal allowance.

That is correct . You can still take 25% of the pension pot tax free, regardless of other income , but all your taxable income , including from DC pots , DB pension , state pension , paid employment etc is taken into account in your overall tax calculation.