Taking <25% of personal pension pot?

ejstubbs

I think this is a fairly straightforward question which may well have been asked before - though I've no idea how I could check that without exhaustive searching (I can't even begin to conceive of what a useful search string might look like).  So, apologies in advance but here goes:

I have a personal pension pot with Standard Life.  For argument's sake let's say it's currently worth around £100K.  If I decided that I needed some of the money - let's say £10K, so not even the full 25% that I could take tax-free - would I be right to assume that the remaining £90K would remain invested and continue to grow in value (well, under less abnormal circumstances it would, anyway)?

Let's then also say that, after a period of time, it had grown by a further 5%.  Would I then be allowed to withdraw £15K (i.e. the remaining tax-free 15% of the original £100K) plus the 5% that said tax-free amount had grown by, i.e. £15K x 1.05 = £15,750 tax-free?  Or does the tax-free amount get "frozen" at the point of the first withdrawal, so any growth to the total remaining pot post the date of the original tax-free withdrawal would all be taxable if taken as cash?

Or would some other, completely different, calculations apply?

ader42

Assuming £100k pot.

When you take a tax-free lump sum you crystallize a chunk of the pension.
To take £10k you crystallize 40%, leaving you £60k uncrystallized and £30k crystallized.

Assume it grows by 5%, you will have £63k uncrystallized and £31.5k crystallized.

You can then crystallize the uncrystallized part to take a further 25% of that £63k tax-free (£15,750) leaving £47.250 of it in the crystallized pot.

Taking any of the £31.5k from the first crystallized chunk is taxed.
Taking any of the £47.250 from the second crystallized chunk is taxed.

That’s my understanding anyway…

But not all pension providers provide this level of flexibility so you might need to transfer the penion first.

steampowered

You could consider withdrawing the full lump sum, and investing what you don't need to spend into a stocks & shares ISA.

ejstubbs

Thanks for this explanation.

So the 40% crystallized is because I take 40% of the possible tax-free £25K, is that right?  So if I took £15K instead of £10K then 60% would be crystallized?

So, let me see if I have understood this correctly by positing another example.  If, instead of £15,750 I took £10.5K the second time around, that would be 66.7% of the amount available to take tax free at that time.  That would therefore crystallize £42K of the £63K would, leaving £21K uncrystallized and a total of £42K-£10.5K+£31.5K=£61.5K cystallized, giving £84K still left in the pot.  Assuming for simplicity no further growth, I could then take one final chunk of 25% of the uncrystallized £21K = £5.25K tax free, and everything after that would be taxable.  That all seems to add up correctly.  Have I got it right?

Albermarle

The way to look at it is that you can take 25% tax free of the amount you crystallise.
So if you want to take £10K tax free, you have to crystallise £40K - get £10K tax free cash and £30K remains in the pension as crystallised funds. Anything you take from crystallised funds is classed as taxable income. Whether it is actually taxed or not depends on your personal tax/income situation.

Otherwise your calculation is correct.

Older pensions may not offer some of this flexibility, or only part of it. So it maybe necessary to transfer the pension first to a more modern one.

ejstubbs

Thanks for the explanations.  I shall have to pin this question and the answers somewhere for future reference!

Adyinvestment

Albermarle said:

The way to look at it is that you can take 25% tax free of the amount you crystallise.
So if you want to take £10K tax free, you have to crystallise £40K - get £10K tax free cash and £30K remains in the pension as crystallised funds. Anything you take from crystallised funds is classed as taxable income.

If this was done as the example, and the pension then entered into drawdown, do you have the flexibility to stipulate whether you draw from the crystallised or uncrystallised portion?

Linton

Adyinvestment said:

Albermarle said:

The way to look at it is that you can take 25% tax free of the amount you crystallise.
So if you want to take £10K tax free, you have to crystallise £40K - get £10K tax free cash and £30K remains in the pension as crystallised funds. Anything you take from crystallised funds is classed as taxable income.

If this was done as the example, and the pension then entered into drawdown, do you have the flexibility to stipulate whether you draw from the crystallised or uncrystallised portion?

In general platforms will not let you draw down from an uncrystalised pension.    Under almost all circumstances it would be a foolish thing to do anyway because you would lose the option to take the 25% tax free.