Taking £10k from my pension as part of the tax free element - pitfalls?

Nick9967

Hi all
am sure its been asked a million times but i cant find the posts,
I have a pension pot with SW and i need to get my hands on £10k (hopefully free from tax) I'm 55 and intend to semi retire (go part time) in 3 years or so .

The pot is worth around £220k at the moment , not overly concerned about the size of it, it only has to last me 20 years max at about 12-15k pa in drawdown,  as i have other avenues to add to my income. 

My concern is fully understanding the implications to me / my pot of taking the 10k now, other than obviously lowering the pot value of course.

any help gratefully received!

Albermarle

What you suggest is perfectly OK.
Three points to look out for
1) Older pensions have less flexibility, so it could be you have to take all the 25% tax free at once. With a newer pension you could take it in stages, like you suggest. You will need to check their website or maybe call them.
2) If it is not very flexible you could transfer to a newer SW pension, or just transfer out to a new provider.
3) Customer service etc from SW is not one of the best, and at the moment they are implementing a new system, so things seem to have got a lot worse. Do not expect any quick responses, or maybe any response at all...........

Nick9967

Albermarle said:

What you suggest is perfectly OK.
Three points to look out for
1) Older pensions have less flexibility, so it could be you have to take all the 25% tax free at once. With a newer pension you could take it in stages, like you suggest. You will need to check their website or maybe call them.
2) If it is not very flexible you could transfer to a newer SW pension, or just transfer out to a new provider.
3) Customer service etc from SW is not one of the best, and at the moment they are implementing a new system, so things seem to have got a lot worse. Do not expect any quick responses, or maybe any response at all...........

Thanks, was trying to work out in my head (actually on my retirement spread sheets) whether how it will effect my crystallised / uncrystallised parts of my pension drawdown for the future as my calculations rely on 25% of each drawdown being tax free for the entire length of drawing 20 years - if I'm not wrong taking this 10k tax free means i have to crystallise another 30k which leaves me with only 180 to use in drawdown in my 25/75 scenario each year? although i suppose if i used that 30 , theoretically, in the middle couple of years where other income will be minimal and  wont cause tax stress for me! 
That's more of a question than a statement really.

gm0

You are able to take a "phase" aka a slice of benefits less than your total fund via Flexible Access Drawdown - FAD leaving the rest untouched.  25% tax free = 10k and marking as FAD does a further 30k for income so 40k crystallised. 

Leaving the rest of the pot and its tax free allowance untouched. And leaving the 30k invested.  All that is legal and allowed.  Whether your current product supports those particular options exactly may vary - also entirely legally.  Full transfer out is always supported to go somewhere that does the option you want.

If you don't take any income from the 75% 30k then your ability to save (Money Purchase Annual Allowance MPAA should be unaffected.  If you do take income from that portion then it will be clamped down to 4000 which could affect future employement contributions and tax relief in a way you don't want.  So be careful of that.

It will be important to be very specific in your instructions and to validate that your current scheme can do exactly what you want in the way that you want.   

If it cannot and a product change is offered (in the form of a transfer underneath) then this as good a time as any to consider what scheme, funds and platform you want to use for drawdown.  And move. 

Clearly you could make a small partial transfer or a full transfer by "pulling" the pension to a new provider over the Origo electronic transfer system.  That works like ISA transfers - it is pulled by the new provider not pushed by the one you are leaving in terms of who you deal with anyway.  

Which of these makes sense depends upon the investment choices, prices etc of your current scheme and any alternative considered. 

I had a scenario where my existing product was old but good so I kept it and made partial transfers out.  Old can be good and it can be bad so this too pays for checking

Marcon

Nick9967 said:

Albermarle said:

What you suggest is perfectly OK.
Three points to look out for
1) Older pensions have less flexibility, so it could be you have to take all the 25% tax free at once. With a newer pension you could take it in stages, like you suggest. You will need to check their website or maybe call them.
2) If it is not very flexible you could transfer to a newer SW pension, or just transfer out to a new provider.
3) Customer service etc from SW is not one of the best, and at the moment they are implementing a new system, so things seem to have got a lot worse. Do not expect any quick responses, or maybe any response at all...........

Thanks, was trying to work out in my head (actually on my retirement spread sheets) whether how it will effect my crystallised / uncrystallised parts of my pension drawdown for the future as my calculations rely on 25% of each drawdown being tax free for the entire length of drawing 20 years - if I'm not wrong taking this 10k tax free means i have to crystallise another 30k which leaves me with only 180 to use in drawdown in my 25/75 scenario each year? although i suppose if i used that 30 , theoretically, in the middle couple of years where other income will be minimal and  wont cause tax stress for me! 
That's more of a question than a statement really.

If you want to keep your life simple (well, relatively!) in relation to your pension scheme, then using the 'small pots' regime could be your friend. I don't think SW will split your pot (could be wrong), but other providers (e.g. HL) will, so you might need to transfer if you want to follow this route.

You can cash in up to 3 small pots (same time or different times, doesn't matter), each of no more than £10,000, taking the whole small pot in one go. 25% is tax free, the rest is taxable at your marginal rate. Two advantages: doesn't trigger the MPAA and restrict future contributions, and uses 0% of the LifeTime Allowance. You'd pay some tax, but if you then contribute a similar amount to your pension, you'll get tax relief. Beware the pension recycling rules - but also be aware that they apply to the tax free cash element and you'd be contributing in respect of the taxed bit, assuming you have earnings which would cover your pension contributions.  More info: https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/