Cons Of Taking Pension Drawdown To Leverage Annual Tax Allowance

TojoRalph

Having retired in 2020 (at least I think I have), I am just looking for some feedback on my plan to drawdown £16,760 from a personal DC pension to leverage the £12,570 annual allowance (Scotland) for 2021-2022 that I will not otherwise have used as I have zero taxable income for that tax year. My plan for the next 10 years, assuming I live that long, is to spend monies that sit outside of my personal DC pensions and to leave pension monies where they are. However, I have an annual allowance I can use if I draw down money from one of my personal DC pension pots, which was suggested to me some time ago that I might be wise to do. I appreciate I receive 25% of the £16,760 tax free, get taxed on the £12,570 and claim the tax back via self assessment.

As I understand matters, the remaining pension funds simply carry on as they were, I could do the same again next year and if I needed and I could still take 25% of the pot tax free at any point. The only negative I see is if I were to return to work as I would only be allowed to put £4,000 in any DC pension. Are there any other negatives I should be aware of? Thanks in advance.

NedS

As you say, it can make sense to withdraw up to your personal tax allowance each year. You could move the money into a S&S ISA and reinvest in the same or similar investments if you don't actually need the cash, but all else being equal, it's worth utilising your personal tax allowance.

Things to watch out for are, as you've identified, triggering the MPAA meaning you will no longer be able to contribute more than £4k gross into a DC pension scheme should you return to employment. The other consideration would be IHT planning where money inside a pension wrapper is outside of your estate and thus exempt from inheritance tax should that be a concern for you.

Dazed_and_C0nfused

TojoRalph said:

Having retired in 2020 (at least I think I have), I am just looking for some feedback on my plan to drawdown £16,760 from a personal DC pension to leverage the £12,570 annual allowance (Scotland) for 2021-2022 that I will not otherwise have used as I have zero taxable income for that tax year. My plan for the next 10 years, assuming I live that long, is to spend monies that sit outside of my personal DC pensions and to leave pension monies where they are. However, I have an annual allowance I can use if I draw down money from one of my personal DC pension pots, which was suggested to me some time ago that I might be wise to do. I appreciate I receive 25% of the £16,760 tax free, get taxed on the £12,570 and claim the tax back via self assessment.

As I understand matters, the remaining pension funds simply carry on as they were, I could do the same again next year and if I needed and I could still take 25% of the pot tax free at any point. The only negative I see is if I were to return to work as I would only be allowed to put £4,000 in any DC pension. Are there any other negatives I should be aware of? Thanks in advance.

If you have no taxable income other than the pension you plan on drawing from why on earth are you completing Self Assessment returns.  

Seems like you haven't told us the whole story here?

sheslookinhot

Dazed_and_C0nfused said:

TojoRalph said:

Having retired in 2020 (at least I think I have), I am just looking for some feedback on my plan to drawdown £16,760 from a personal DC pension to leverage the £12,570 annual allowance (Scotland) for 2021-2022 that I will not otherwise have used as I have zero taxable income for that tax year. My plan for the next 10 years, assuming I live that long, is to spend monies that sit outside of my personal DC pensions and to leave pension monies where they are. However, I have an annual allowance I can use if I draw down money from one of my personal DC pension pots, which was suggested to me some time ago that I might be wise to do. I appreciate I receive 25% of the £16,760 tax free, get taxed on the £12,570 and claim the tax back via self assessment.

As I understand matters, the remaining pension funds simply carry on as they were, I could do the same again next year and if I needed and I could still take 25% of the pot tax free at any point. The only negative I see is if I were to return to work as I would only be allowed to put £4,000 in any DC pension. Are there any other negatives I should be aware of? Thanks in advance.

If you have no taxable income other than the pension you plan on drawing from why on earth are you completing Self Assessment returns.  

Seems like you haven't told us the whole story here?

Seems like the OP is under the misapprehension that a SA is needed to reclaim tax, rather than wait for it to be refunded by HMRC. No need for dramatics surely.

TojoRalph

NedS said:

As you say, it can make sense to withdraw up to your personal tax allowance each year. You could move the money into a S&S ISA and reinvest in the same or similar investments if you don't actually need the cash, but all else being equal, it's worth utilising your personal tax allowance.

Things to watch out for are, as you've identified, triggering the MPAA meaning you will no longer be able to contribute more than £4k gross into a DC pension scheme should you return to employment. The other consideration would be IHT planning where money inside a pension wrapper is outside of your estate and thus exempt from inheritance tax should that be a concern for you.

Thanks for the reply and your thoughts. The IHT part is indeed a concern, hence my plan to fund the early to mid years of my retirement from assets/monies that are not protected by the pension wrapper and that would be subject to IHT were I to pop my clogs. This is part of the concern really, removing £16,760 each year to leverage "avoiding" tax of approx. £2,500, only to then potentially expose the £16,760 to 40% IHT. If only we knew when our time was going to be up . 

TojoRalph

sheslookinhot said:

Dazed_and_C0nfused said:

TojoRalph said:

Having retired in 2020 (at least I think I have), I am just looking for some feedback on my plan to drawdown £16,760 from a personal DC pension to leverage the £12,570 annual allowance (Scotland) for 2021-2022 that I will not otherwise have used as I have zero taxable income for that tax year. My plan for the next 10 years, assuming I live that long, is to spend monies that sit outside of my personal DC pensions and to leave pension monies where they are. However, I have an annual allowance I can use if I draw down money from one of my personal DC pension pots, which was suggested to me some time ago that I might be wise to do. I appreciate I receive 25% of the £16,760 tax free, get taxed on the £12,570 and claim the tax back via self assessment.

As I understand matters, the remaining pension funds simply carry on as they were, I could do the same again next year and if I needed and I could still take 25% of the pot tax free at any point. The only negative I see is if I were to return to work as I would only be allowed to put £4,000 in any DC pension. Are there any other negatives I should be aware of? Thanks in advance.

If you have no taxable income other than the pension you plan on drawing from why on earth are you completing Self Assessment returns.  

Seems like you haven't told us the whole story here?

Seems like the OP is under the misapprehension that a SA is needed to reclaim tax, rather than wait for it to be refunded by HMRC. No need for dramatics surely.

You are 100% correct. I had assumed that I would be required to complete SA to reclaim the tax taken/withheld by the pension provider when making payment to me. If that is not the case, then great. Thanks.

TojoRalph

Dazed_and_C0nfused said:

TojoRalph said:

Having retired in 2020 (at least I think I have), I am just looking for some feedback on my plan to drawdown £16,760 from a personal DC pension to leverage the £12,570 annual allowance (Scotland) for 2021-2022 that I will not otherwise have used as I have zero taxable income for that tax year. My plan for the next 10 years, assuming I live that long, is to spend monies that sit outside of my personal DC pensions and to leave pension monies where they are. However, I have an annual allowance I can use if I draw down money from one of my personal DC pension pots, which was suggested to me some time ago that I might be wise to do. I appreciate I receive 25% of the £16,760 tax free, get taxed on the £12,570 and claim the tax back via self assessment.

As I understand matters, the remaining pension funds simply carry on as they were, I could do the same again next year and if I needed and I could still take 25% of the pot tax free at any point. The only negative I see is if I were to return to work as I would only be allowed to put £4,000 in any DC pension. Are there any other negatives I should be aware of? Thanks in advance.

If you have no taxable income other than the pension you plan on drawing from why on earth are you completing Self Assessment returns.  

Seems like you haven't told us the whole story here?

You have the whole story and as @she@sheslookinhot correctly guessed, I had assumed that to claim back the tax taken by the pension provider, I would need to do self assessment. 

Albermarle

TojoRalph said:

NedS said:

As you say, it can make sense to withdraw up to your personal tax allowance each year. You could move the money into a S&S ISA and reinvest in the same or similar investments if you don't actually need the cash, but all else being equal, it's worth utilising your personal tax allowance.

Things to watch out for are, as you've identified, triggering the MPAA meaning you will no longer be able to contribute more than £4k gross into a DC pension scheme should you return to employment. The other consideration would be IHT planning where money inside a pension wrapper is outside of your estate and thus exempt from inheritance tax should that be a concern for you.

Thanks for the reply and your thoughts. The IHT part is indeed a concern, hence my plan to fund the early to mid years of my retirement from assets/monies that are not protected by the pension wrapper and that would be subject to IHT were I to pop my clogs. This is part of the concern really, removing £16,760 each year to leverage "avoiding" tax of approx. £2,500, only to then potentially expose the £16,760 to 40% IHT. If only we knew when our time was going to be up . 

Everybody's personal situation is different and only you ( or a financial advisor if you had one ) can calculate the best way for you. 
You are right that we do not know when we will pop our clogs , but statistics show that a 60 year old man , should on average last another 25 years. If you are healthy, have money , well educated and with not too many bad habits then you should live longer than average statistically . If you have a partner in a similar position then there is a 25% chance one of you will still be alive at 95.
So I suppose in the absence of any concrete info you could work around these figures in your planning.

TojoRalph

Albermarle said:

TojoRalph said:

NedS said:

As you say, it can make sense to withdraw up to your personal tax allowance each year. You could move the money into a S&S ISA and reinvest in the same or similar investments if you don't actually need the cash, but all else being equal, it's worth utilising your personal tax allowance.

Things to watch out for are, as you've identified, triggering the MPAA meaning you will no longer be able to contribute more than £4k gross into a DC pension scheme should you return to employment. The other consideration would be IHT planning where money inside a pension wrapper is outside of your estate and thus exempt from inheritance tax should that be a concern for you.

Thanks for the reply and your thoughts. The IHT part is indeed a concern, hence my plan to fund the early to mid years of my retirement from assets/monies that are not protected by the pension wrapper and that would be subject to IHT were I to pop my clogs. This is part of the concern really, removing £16,760 each year to leverage "avoiding" tax of approx. £2,500, only to then potentially expose the £16,760 to 40% IHT. If only we knew when our time was going to be up . 

Everybody's personal situation is different and only you ( or a financial advisor if you had one ) can calculate the best way for you. 
You are right that we do not know when we will pop our clogs , but statistics show that a 60 year old man , should on average last another 25 years. If you are healthy, have money , well educated and with not too many bad habits then you should live longer than average statistically . If you have a partner in a similar position then there is a 25% chance one of you will still be alive at 95.
So I suppose in the absence of any concrete info you could work around these figures in your planning.

Based on things as they are, I would happily settle for another 20 years and that is what my plan is loosely based on ..... Fingers crossed. 

Dazed_and_C0nfused

TojoRalph said:

Dazed_and_C0nfused said:

TojoRalph said:

Having retired in 2020 (at least I think I have), I am just looking for some feedback on my plan to drawdown £16,760 from a personal DC pension to leverage the £12,570 annual allowance (Scotland) for 2021-2022 that I will not otherwise have used as I have zero taxable income for that tax year. My plan for the next 10 years, assuming I live that long, is to spend monies that sit outside of my personal DC pensions and to leave pension monies where they are. However, I have an annual allowance I can use if I draw down money from one of my personal DC pension pots, which was suggested to me some time ago that I might be wise to do. I appreciate I receive 25% of the £16,760 tax free, get taxed on the £12,570 and claim the tax back via self assessment.

As I understand matters, the remaining pension funds simply carry on as they were, I could do the same again next year and if I needed and I could still take 25% of the pot tax free at any point. The only negative I see is if I were to return to work as I would only be allowed to put £4,000 in any DC pension. Are there any other negatives I should be aware of? Thanks in advance.

If you have no taxable income other than the pension you plan on drawing from why on earth are you completing Self Assessment returns.  

Seems like you haven't told us the whole story here?

You have the whole story and as @she@sheslookinhot correctly guessed, I had assumed that to claim back the tax taken by the pension provider, I would need to do self assessment. 

You don't even need to pay tax in the first place if you don't want to.

The emergency tax code (1257L) is used for the first payment so if you take £1,048 (in taxable income) or less then no tax will be deducted.

You can then take the same each month and no tax will be deducted.

If tax is deducted that ultimately isn't due then HMRC will automatically refund it.  Although you do have the option of claiming a refund yourself rather than waiting for HMRC.

https://www.gov.uk/tax-overpayments-and-underpayments

TojoRalph

Dazed_and_C0nfused said:

TojoRalph said:

Dazed_and_C0nfused said:

TojoRalph said:

Having retired in 2020 (at least I think I have), I am just looking for some feedback on my plan to drawdown £16,760 from a personal DC pension to leverage the £12,570 annual allowance (Scotland) for 2021-2022 that I will not otherwise have used as I have zero taxable income for that tax year. My plan for the next 10 years, assuming I live that long, is to spend monies that sit outside of my personal DC pensions and to leave pension monies where they are. However, I have an annual allowance I can use if I draw down money from one of my personal DC pension pots, which was suggested to me some time ago that I might be wise to do. I appreciate I receive 25% of the £16,760 tax free, get taxed on the £12,570 and claim the tax back via self assessment.

As I understand matters, the remaining pension funds simply carry on as they were, I could do the same again next year and if I needed and I could still take 25% of the pot tax free at any point. The only negative I see is if I were to return to work as I would only be allowed to put £4,000 in any DC pension. Are there any other negatives I should be aware of? Thanks in advance.

If you have no taxable income other than the pension you plan on drawing from why on earth are you completing Self Assessment returns.  

Seems like you haven't told us the whole story here?

You have the whole story and as @she@sheslookinhot correctly guessed, I had assumed that to claim back the tax taken by the pension provider, I would need to do self assessment. 

You don't even need to pay tax in the first place if you don't want to.

The emergency tax code (1257L) is used for the first payment so if you take £1,048 (in taxable income) or less then no tax will be deducted.

You can then take the same each month and no tax will be deducted.

If tax is deducted that ultimately isn't due then HMRC will automatically refund it.  Although you do have the option of claiming a refund yourself rather than waiting for HMRC.

https://www.gov.uk/tax-overpayments-and-underpayments

Thanks and understood. For this tax year at least, I think I will complete the £16,760 withdrawal request and let nature take its course with getting the tax refund. As you say, it will be subject to emergency tax. For whatever reason, I assumed that after 40+ years of PAYE transparency, the tax folk would request I do SA. The key part I think is knowing that having made a withdrawal, all funds that remain in my pension will remain safe from IHT, at least until I am 75. Thanks.