Clarity on Pension Drawdown and Tax

booveedoo

Hi. I`ve just been reading on "Do you pay income tax on pension drawdown?" on Moneyhelper.org https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/what-is-flexible-retirement-income-pension-drawdown  It states that "For example, you have a pot of £80,000 and take a tax-free lump sum of £20,000. This leaves you with £60,000 to invest. If you take an income of £3,000 a year from your pension pot and are a basic rate taxpayer, you’ll pay 20% tax and so you’ll get £2,400" I`m a little confused. If you`re only drawing an income of £3000 a year, and that you`ve already take your 25% tax free, why on this amount (3000) are you paying 20%? £3000 is way below the threshold of £12570?  Or do you pay this cos you`ve already taken the TF allowance?

Brie

I agree with you - you wouldn't pay tax if the total income is below the threshold but that income total is for everything.  So if you have SP and are getting drawdown and maybe earning by whatever - window washing etc - then you will be paying tax on some of your income.

dunstonh

I`m a little confused. If you`re only drawing an income of £3000 a year, and that you`ve already take your 25% tax free, why on this amount (3000) are you paying 20%?

The page says "if you are a basic rate taxpayer".  So, the scenario they paint is a basic rate taxpayer.  

Albermarle

Yes the article is misleading. Income from pensions is treated like income from working. You have a personal allowance of £12570 ( normally that amount, but it can be different) and if your income is below that you do not pay any tax on it. 

booveedoo

dunstonh said:

I`m a little confused. If you`re only drawing an income of £3000 a year, and that you`ve already take your 25% tax free, why on this amount (3000) are you paying 20%?

The page says "if you are a basic rate taxpayer".  So, the scenario they paint is a basic rate taxpayer.  

Yes. I agree. But why confuse it by saying drawing down on £3000. Why not make the example higher values i.e pot of £300K and £15k drawdown. Then it would be a lot clearer, in my view anyway 

dunstonh

booveedoo said:

dunstonh said:

I`m a little confused. If you`re only drawing an income of £3000 a year, and that you`ve already take your 25% tax free, why on this amount (3000) are you paying 20%?

The page says "if you are a basic rate taxpayer".  So, the scenario they paint is a basic rate taxpayer.  

Yes. I agree. But why confuse it by saying drawing down on £3000. Why not make the example higher values i.e pot of £300K and £15k drawdown. Then it would be a lot clearer, in my view anyway 

As Martin once said on here when scenarios didn't fit his articles, he cannot write to cater for everything.  Many people have short attention spans and stop reading after a few paragraphs if it gets too heavy for them.  So, he catered for the majority position.   This appears to be wheat what they are doing as well.

robatwork

dunstonh said:

As Martin once said on here when scenarios didn't fit his articles, he cannot write to cater for everything.  Many people have short attention spans and stop reading after a few paragraphs if it gets too heavy for them.  So, he catered for the majority position.   This appears to be wheat they are doing as well.

Your answer is barley acceptable. Maize well try again with it spelt rye-t.

A_T

"If you take an income of £3,000 a year from your pension pot and are a basic rate taxpayer"

if your income is only 3k you won't be a basic rate taxpayer

dunstonh

robatwork said:

dunstonh said:

As Martin once said on here when scenarios didn't fit his articles, he cannot write to cater for everything.  Many people have short attention spans and stop reading after a few paragraphs if it gets too heavy for them.  So, he catered for the majority position.   This appears to be wheat they are doing as well.

Your answer is barley acceptable. Maize well try again with it spelt rye-t.

I suppose you reap what you sow

Dazed_and_C0nfused

A_T said:

"If you take an income of £3,000 a year from your pension pot and are a basic rate taxpayer"

if your income is only 3k you won't be a basic rate taxpayer

I think you're missing the crucial word there.

A_T

Dazed_and_C0nfused said:

A_T said:

"If you take an income of £3,000 a year from your pension pot and are a basic rate taxpayer"

if your income is only 3k you won't be a basic rate taxpayer

I think you're missing the crucial word there.

no I think the OP is