25% tax free withdrawal from a pension funded this happens every year until the fund

Tax_Slave

Hi - I have two final salary pensions where one starts next week and the other in 12 months time.
I’m aged 59 and not working with no plans to work either at the moment. Maybe volunteer at some point for a charity.

Anyway my question is as follows;
I have a pension fund worth £250,000 and growing as it’s invested. I have not taken any money from this fund and I think the term is it is un-crystallised. 

Next year I would like to start a drawdown on this pension and take £11,000 per year from it.
How does the taking tax free bit work?
Do they take a snap shot and say fund was worth £250,000 when you crystallised it and thus you are allowed £62,500 free and when your draw down exceeds this it’s taxable aka I take £11,000 a year for 5 years tax free and then 6th year as it goes above £62,500 some is declared for tax?
or 
Do they pay me £11,000 a year and 25% is tax free and 75% is taxable?
And this happens every year until the  fund  is empty?

my two final salary pensions will be worth more than £12,500 tax  allowance per year.

Thanks in advance for any answers.

Marcon

Tax_Slave said:

Hi - I have two final salary pensions where one starts next week and the other in 12 months time.
I’m aged 59 and not working with no plans to work either at the moment. Maybe volunteer at some point for a charity.

Anyway my question is as follows;
I have a pension fund worth £250,000 and growing as it’s invested. I have not taken any money from this fund and I think the term is it is un-crystallised. 

Next year I would like to start a drawdown on this pension and take £11,000 per year from it.
How does the taking tax free bit work?
Do they take a snap shot and say fund was worth £250,000 when you crystallised it and thus you are allowed £62,500 free and when your draw down exceeds this it’s taxable aka I take £11,000 a year for 5 years tax free and then 6th year as it goes above £62,500 some is declared for tax?
or 
Do they pay me £11,000 a year and 25% is tax free and 75% is taxable?
And this happens every year until the  fund  is empty?

my two final salary pensions will be worth more than £12,500 tax  allowance per year.

Thanks in advance for any answers.

Good explanations here:

https://www.which.co.uk/money/pensions-and-retirement/options-for-cashing-in-your-pensions/income-drawdown/what-is-income-drawdown-apsqg6y8pg57

or

https://www.hl.co.uk/retirement/drawdown/how-it-works

tacpot12

Congratulations on your impending retirement! I spent the first year of my retirement doing all those little jobs around the house that had needed doing for a while. Once they were done, I found myself at a bit of loose end and started volunteering with a local organisation. I find it rewarding and quite liberating because as a volunteer I can pass all the really difficult issues to a manager, and take time off as and when I need to.

Albermarle

Tax_Slave said:

Hi - I have two final salary pensions where one starts next week and the other in 12 months time.
I’m aged 59 and not working with no plans to work either at the moment. Maybe volunteer at some point for a charity.

Anyway my question is as follows;
I have a pension fund worth £250,000 and growing as it’s invested. I have not taken any money from this fund and I think the term is it is un-crystallised. 

Next year I would like to start a drawdown on this pension and take £11,000 per year from it.
How does the taking tax free bit work?
Do they take a snap shot and say fund was worth £250,000 when you crystallised it and thus you are allowed £62,500 free and when your draw down exceeds this it’s taxable aka I take £11,000 a year for 5 years tax free and then 6th year as it goes above £62,500 some is declared for tax?
or 
Do they pay me £11,000 a year and 25% is tax free and 75% is taxable?
And this happens every year until the  fund  is empty?

my two final salary pensions will be worth more than £12,500 tax  allowance per year.

Thanks in advance for any answers.

Basically there are various ways to do it , as explained in the links above. One thing to look out for though is not all pension providers offer the same flexibility . If you have an older pension , it might well be that you have to transfer it before being able to use the option you want . This is not a big deal as transferring DC pensions is easy on line . Even cashback incentives are offered in some cases.

NoMore

The other thing to watch out for  you say your two db pensions will be worth more than £12500 but if it's significantly more you could start to run into LTA issues, which will affect the amount of tax free cash you can take.

LTA is currently just over a million pounds, DC pots for LTA are just the value of them so for you £250000, DB pensions are calculated as 20 times the annual pension plus any tax free cash from it, so for a 20000 db with 50k tax free cash for example that would be 450000 pounds. 

Tax_Slave

Thanks for the answers so far everyone.

I have read the links and another question as a result.

it says you move an amount of money into drawdown and in example pension is worth say £100k , they want a tax free lump sum of £10K and thus move £40k into drawdown.
Does money in drawdown that’s left aka £30k remain invested and thus rising or falling depending on investment fund?

Could I do the following (my pension provider allows drawdown);
- Move entire £250,000 into drawdown.
- £62,500 of £250,000 becomes tax free part.
- Take £11,000 from drawdown in year 1 (tax free).
- Remaining £239,000 remains in invested in whatever funds aka current ones  (I have a few dozen or more to choose from).
- Year 2 take £11,000 tax free.
- Remaining £228,000 remains invested (I expect some growth however if the £239,000 remained invested , but for this example we will say no growth to keep things simple).
- Year 3 take £11,000 tax free.…..and until I pass the £62,500 tax free bit and then start paying tax on the £11,000.
in summary does the drawdown pot remain invested?

I guess once you move entire pot into drawdown then HMRC take current value to calculate 25% tax free part.
then if while in drawdown investment say doubles , then growth amount will not give you more at 25% tax free.

Secret2ndAccount

Can we pretend you want to take 12,000 per year as it makes the sums neater.
If you want to take 12,000 in year 1, you crystallise just 12,000 and take it all. 3,000 is tax free, and 9,000 is taxable. All the rest of the pension remains uncrystallised
Year 2, you do exactly the same - you just crystallise the amount you want to take.

Option B - you want to take the 12k without paying tax:
Year 1, crystallise 48,000. That's 12,000 tax free, which you withdraw, and 36,000 taxable which you leave in. Whenever you withdraw that money, it's all taxable. If it grows to 40,000 you pay tax on 40,000 when you withdraw it. Rest of the pension remains uncrystallised.
In year 2, you could crystallise another 48k and take another 12k tax free, or you could crystallise 12k and take 3k tax free, 9k taxed. Or you could take 12k out of the crystallised portion and pay tax on all of it.

If you crystallise the whole lot, you need to take the ~65k now, and then find somewhere to reinvest it - e.g. ISA's. You can't leave the tax free part in the pension. If you don't need the money, the only reason to crystallise the whole lot would be to prevent you from breaching the Lifetime Allowance. 

Tax_Slave

Secret2ndAccount said:

Can we pretend you want to take 12,000 per year as it makes the sums neater.
If you want to take 12,000 in year 1, you crystallise just 12,000 and take it all. 3,000 is tax free, and 9,000 is taxable. All the rest of the pension remains uncrystallised
Year 2, you do exactly the same - you just crystallise the amount you want to take.

Option B - you want to take the 12k without paying tax:
Year 1, crystallise 48,000. That's 12,000 tax free, which you withdraw, and 36,000 taxable which you leave in. Whenever you withdraw that money, it's all taxable. If it grows to 40,000 you pay tax on 40,000 when you withdraw it. Rest of the pension remains uncrystallised.
In year 2, you could crystallise another 48k and take another 12k tax free, or you could crystallise 12k and take 3k tax free, 9k taxed. Or you could take 12k out of the crystallised portion and pay tax on all of it.

If you crystallise the whole lot, you need to take the ~65k now, and then find somewhere to reinvest it - e.g. ISA's. You can't leave the tax free part in the pension. If you don't need the money, the only reason to crystallise the whole lot would be to prevent you from breaching the Lifetime Allowance. 

Thanks for the clear explanation and time you gave to it …..I get it now :-)


Just one more question sorry ….last one I hope.

if I was to crystallise the whole £250,000 and take the 25% tax free that lands in bank account as one tax free lump sum of £62,500, then I die before I’m 75 (higher than average probability actually), will what remains in pension pot plus any growth go to my wife tax free as sole beneficiary in my will?

 

Secret2ndAccount

Fill out a nomination form - separate from your will - to instruct the pension company you would like to leave your SIPP to your wife
The funds still inside the SIPP, crystallised or not, will pass to your wife tax free. She can keep it as a SIPP, or take the money out as cash.

The small print:
As you say, you have to die before age 75, or tax starts to enter into it
Have to be below the LTA
Have to get the handover sorted inside two years
Technically the pension company can pay the SIPP to whomever they choose, but if you have filled out a nomination, your wife is still alive, and you were still married, they are going to choose to pay it to her.