25% tax free lump sum

Decked

With all the current termoil over pension pots etc, I am waying up my options.
we are thinking of stopping full time work in about 3.5 years. We had planned for a few things which included some home improvements.
these would total maybe £20-£25k.

we are wondering if it makes sense to withdraw out of the fund at the moment and benefit from the work 3 years earlier.

What are the rules on taking tax free cash from your DC fund?

in theory I could take say 10% tax free to cover this work. So for arguments sake. Pot is worth £200k, I take 10% now, what happens in say 5 years time? Am I allowed 15% of the remaining pot?

I will be increasing my contributions over the next few years, so again for arguments sake, let’s say in 5 years the pot is work £220k can I then take 15% tax free?

thanks

p00hsticks

Decked said:

With all the current termoil over pension pots etc, I am waying up my options.
we are thinking of stopping full time work in about 3.5 years. We had planned for a few things which included some home improvements.
these would total maybe £20-£25k.

we are wondering if it makes sense to withdraw out of the fund at the moment and benefit from the work 3 years earlier.

What are the rules on taking tax free cash from your DC fund?

in theory I could take say 10% tax free to cover this work. So for arguments sake. Pot is worth £200k, I take 10% now, what happens in say 5 years time? Am I allowed 15% of the remaining pot?

I will be increasing my contributions over the next few years, so again for arguments sake, let’s say in 5 years the pot is work £220k can I then take 15% tax free?

thanks

My understanding is that the way it can work (assuming your particular provider can do it) is - 
If you want to take £20k out, all tax free, then you 'crystallise' £80k from your pot. 
You can then withdraw the 25% TFLS of £20k from this, and leave the remaining £60k still invested in the pension scheme - anything you subsequently take from this 'crystallised' pot would all be taxable, and anything you take from it will trigger the MPAA, mweaning that you won't be able to put more than £4k into a pension in future and get tax relief on it. 
The remaining £120k remains 'uncrystallised' and invested so will possibly increase or decease in value depending on your investments. If and when you want more tax free cash you crystallise some or all of it in the same way as before, and take 25% of it as a TFLS   

Decked

Thanks for the reply, that makes sense, you also make a good point about future contributions, I will be putting approx £20k a year in the fund including my employer’s contribution, so that is really important to maintain the ability to do so.

Not sure how pension recycling is determined, but as my outgoings drop over the next few years, I may be able to put more like £25-£30k a year in the fund.

Do you think any of what I propose would fall foul of that 

Decked

One thing I missed, the £60k which is chrystalised, can that grow or reduce in value, or is it essentially £60k regardless, thus limiting any extra potential returns?

p00hsticks

Decked said:

One thing I missed, the £60k which is chrystalised, can that grow or reduce in value, or is it essentially £60k regardless, thus limiting any extra potential returns?

Yes you can keep it invested so it's value can change.  

Albermarle

Decked said:

Thanks for the reply, that makes sense, you also make a good point about future contributions, I will be putting approx £20k a year in the fund including my employer’s contribution, so that is really important to maintain the ability to do so.

Not sure how pension recycling is determined, but as my outgoings drop over the next few years, I may be able to put more like £25-£30k a year in the fund.

Do you think any of what I propose would fall foul of that 

It is unlikely that HMRC will take any interest even if it was technically recycling. This explains it all.

Recycling of tax-free cash - Royal London for advisers

As mentioned some providers are less flexible than others when it comes to taking the tax free cash in tranches rather all at once. Especially if it was set up some years ago.

dunstonh

With all the current termoil over pension pots etc, I am waying up my options.

What turmoil?

we are wondering if it makes sense to withdraw out of the fund at the moment and benefit from the work 3 years earlier.

Can you afford to rob your retirement years to pay for this during your working years?

What are the rules on taking tax-free cash from your DC fund?

Virtually unchanged since 1988 apart from a bit of tweaking in 2006.

in theory I could take say 10% tax free to cover this work. So for arguments sake. Pot is worth £200k, I take 10% now, what happens in say 5 years time? Am I allowed 15% of the remaining pot?

No.  You would crystalise an amount sufficient to cover the cost from the 25%.    This would give you a pot that is part crystallised and part uncrystallised.  You can draw 25% tax free from the uncrystallised pot in the future but never again from the crystallised pot.

these would total maybe £20-£25k.

If you don't have the savings to cover that, then can you afford to rob your pension?  
Seriously.   In your retirement years you will have income needs and capital needs.    If you cannot afford a minor capital need in your working years then how do you expect to cover it in your retirement years?

You need to model the impact of drawing that money against your retirement needs, including periodic capital expenditure.  Especially if you have virtually no savings.    If you can afford it after pulling the money from the pension, then fair enough.  If you can't then it could cause your 20-30 years of reduced lifestyle in retirement.

Decked

Maybe turmoil is a strong way of putting it, but we have been looking at various options including transferring out of DB schemes, the overall values and the Dc values  are down maybe £160k compared to Christmas last year,  but that’s the subject of a different post.

I don’t consider this as robbing my pension fund, in the grand scheme of things £20k is a relativley small proportion  of our potential benefits.

we haven’t got £20k sat in the bank at the moment, but doing some of the work on the house would give us the benefit of the changes maybe 3-4 years earlier than if we wait until we retire. We normally net £5.5 k per month between us, so when we have finished paying for our cars etc we should have a good chunk left over. 

So we will maybe have to work for 5 months longer than our current plans, but we get the benefit of our home improvements 4 years earlier
we aren’t going to borrow any more money, so providing taking some Tfls doesn’t affect our ability to contribute further into the pensions, it doesn’t seem a particularly bad thing to do