Maximising Tax Free Cash in Drawdown

ukdw

jim8888 said:

"Albermarle said:

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).

I made a mistake a bit like that last year - drew out about £70 more than the basic rate allowance and it ended up costing me over £200 in extra tax - due to losing the marriage allowance.

HeyYeah

Are you taxed as soon as it is crystallised or when it is withdraw? I assumed it was the latter but now I'm re-confused

pensionpawn

You can bump up £16760 to £17960 if you take advantage of the £3600 that everyone can pay into their pension pa, even if they have no employment. If you contribute £2880, the government will top up (20%) to £3600, a credit of £720. Now lets say that you draw down from your pension pot the precise amount that would leave you with a tax bill of £720. That figure is £21560 because via UFPLS 75% (£16170) is taxable, however after subtracting your personal allowance of £12570 only £3600 attracts tax at 20% which is £720. So from the £21560 you contribute £2880 into your pension, pay tax of £720 (cancelled out by the tax credit) and you have £17960 tax 'neutral'. Some may decide that this is too much of a faff, and that's fine, however it's a method that gives the highest tax 'neutral' (free?) amount (that I know of) each year. For a couple, with sufficiently large pension pots, that's almost £36k tax free / neutral pa. Not bad in my books....

Albermarle

HeyYeah said:

Are you taxed as soon as it is crystallised or when it is withdraw? I assumed it was the latter but now I'm re-confused

Only when it is withdrawn . The point is that once it is crystallised , there is no more tax free cash possible ( as you have already taken it )  , so anything you take is taxable income. 

HeyYeah

Albermarle said:

HeyYeah said:

Are you taxed as soon as it is crystallised or when it is withdraw? I assumed it was the latter but now I'm re-confused

Only when it is withdrawn . The point is that once it is crystallised , there is no more tax free cash possible ( as you have already taken it )  , so anything you take is taxable income. 

Perfect! Thanks so much.

Dazed_and_C0nfused

ukdw said:

jim8888 said:

"Albermarle said:

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).

I made a mistake a bit like that last year - drew out about £70 more than the basic rate allowance and it ended up costing me over £200 in extra tax - due to losing the marriage allowance.

Still time to correct that if you make Gift Aid payments.  And haven't filed a Self Assessment return for 2020:21 yet.

https://www.litrg.org.uk/tax-guides/savers-property-owners-and-other-tax-issues/giving-charity

jim8888

Albermarle said:

HeyYeah said:

Are you taxed as soon as it is crystallised or when it is withdraw? I assumed it was the latter but now I'm re-confused

Only when it is withdrawn . The point is that once it is crystallised , there is no more tax free cash possible ( as you have already taken it )  , so anything you take is taxable income. 

So I have fully crystallised this pension pot. In the new tax year, I'm going to withdraw the £12,570 from it, which will be taxed. As that will be my only income (I'm not planning any employment) I will claim the tax back via the appropriate form, which I'm sure someone will remind me of what it is.

Dazed_and_C0nfused

Tax may not be deducted.  How do you plan on taking the (taxable) income?

Monthly, ad-hoc withdrawals or all in one go?

jim8888

Dazed_and_C0nfused said:

Tax may not be deducted.  How do you plan on taking the (taxable) income?

Monthly, ad-hoc withdrawals or all in one go?

I'm tempted by the "All in one go" approach, in the hope that I can then stop fretting about the future year's finances! I think I spend far too much time on my retirement budget planning spreadsheets, worrying about my investment allocations and their performance. If I take what I'm pretty sure I'll need for 12 months in April, I'm hoping I can then relax a bit with the cash in the bank and let my investments do whatever it is they're going to do in the year to come. 
On the other hand, what if the markets crash in March next year when I need to repeat the process....maybe a monthly withdrawal is better!
Stuff like this makes me want to go and lie down.

Ciprico

After reading this post, I'd be greatful if someone could clarify the below:

Aim: to take £12,570 (taxable) from HL Sipp for wife who has no other income, to optimise her zero tax band

On the application do we simply put down put withdraw £12,570 as taxable, and HL automatically apply the
£4,190 (25% tax free element) on top.

Or do we apply to withdraw £16,760 and HL assume it includes the tax free element.

Thanks for any guidance