Drawdown pension - under 75

Librana

I'd appreciate advice. I have a drawdown pension pot from which I have already taken the 25% tax-free sum. The remaining pot still exceeds the lifetime allowance. I am 70 now and draw a monthly income on which I pay 40% tax.. Does it make sense for me to increase my monthly drawings to bring the pot down to the LTA by the time I reach 75 or I am as well to keep my drawings as they are accept a 55% charge at 75? Thanks in advance. (I'm assuming that the fund doesn't fall other than by withdrawals).

Albermarle

Some clarification needed.
When you took the 25% tax free, this would have crystallised the whole pension and it would have been measured against the LTA limit at that time.
Was it less than 100% of the limit? Or was it already over 100% and you had to pay an LTA charge at that time?

Librana

From memory I did pay a modest LTA charge at that time. Since then, the fund has grown.Albermarle said:

Some clarification needed.
When you took the 25% tax free, this would have crystallised the whole pension and it would have been measured against the LTA limit at that time.
Was it less than 100% of the limit? Or was it already over 100% and you had to pay an LTA charge at that time?

Albermarle

OK , so on reaching 75, you will pay further LTA tax on the growth since it was first crystallised. The way to stop this happening would be to withdraw all this growth before then. Despite being a 40% taxpayer I think this would be the best way, but wait for other comments.

EdSwippet

Librana said:

Does it make sense for me to increase my monthly drawings to bring the pot down to the LTA by the time I reach 75 or I am as well to keep my drawings as they are accept a 55% charge at 75?

For clarity, the LTA charge is 25%, but with the balance then taxable at your marginal rate when withdrawn. For a basic rate non-Scottish taxpayer, this combination comes out to 40% (39.25% after April next year); for a higher rate taxpayer, 55%.

Now, assumptions. First, that you have used up 100% of your LTA (right?). Second, that you will remain in higher rate tax after age 75? Third, you are not within reach of the usurious 60% tax bracket that begins at £100k. And fourth, that you do not have overriding inheritance tax reasons for leaving money in the pension?

On all the above assumptions, and using non-Scottish tax rates, you should probably increase withdrawals so that at age 75, your drawdown pot is no larger than it was when you crystallised it and entered drawdown. Otherwise, you face a cliff-edge at age 75. For example, suppose you drawdown pot is £100 larger than when crystallised. Withdraw that £100 aged 74 and 364 days and lose £40 in tax. Or leave it for just one more day (or two if a leap year) and lose £25 + £30 = £55 in tax.

Librana

Such helpful comments! EdSwippet, all of your assumptions are valid, so your advice (and that of Albermarle) sounds right for me. Thank you both!