Early retirement (for now) Pension V savings for an income

Marcon

DeadlyD said:

phynix_uk said:

I agree with Audaxer, even if savings are available, you should consider drawing your personal income from your pension equal to the current personal income tax allowance of £12,570. To explain how drawdown works in a defined contribution (DC) pension:

You receive 25% tax free and 75% as income. In drawdown, you can stipulate how you draw funds from the pot meaning you can draw tax-free cash out on its own, income on its own or a combination.

Assuming you have no other taxable income, you can crystallise £16,760 of the pot. This 'benefit crystallisation even' will mean that of the £16,760, 25% is tax-free (£4,190) with the remaining 75% (£12,570) paid as income but equals your personal income tax allowance.

Ah so I can "use" both pots at the same time ie 25% of the tax free (Pot1) and 75% income as drawdown (Pot2) Thank you for explaining. Why the figure £4,190? 
Is it possible to take income (£12,570 pa within tax allowance) and more of the 25% tax free (pot1) in any one year? 
Sorry if I'm missing a point..

Yes. If you plan to return to work when you've retrained, do you plan to build up further pension benefits? If so, be aware that if you take any income except the 25% tax free cash from either DC pot, you will be limited to a maximum of £4,000 tax-relievable pension contributions a year (including tax relief on personal contributions, plus any employer contributions on your behalf) for every year thereafter.

p00hsticks

DeadlyD said:

phynix_uk said:

I agree with Audaxer, even if savings are available, you should consider drawing your personal income from your pension equal to the current personal income tax allowance of £12,570. To explain how drawdown works in a defined contribution (DC) pension:

You receive 25% tax free and 75% as income. In drawdown, you can stipulate how you draw funds from the pot meaning you can draw tax-free cash out on its own, income on its own or a combination.

Assuming you have no other taxable income, you can crystallise £16,760 of the pot. This 'benefit crystallisation even' will mean that of the £16,760, 25% is tax-free (£4,190) with the remaining 75% (£12,570) paid as income but equals your personal income tax allowance.

Ah so I can "use" both pots at the same time ie 25% of the tax free (Pot1) and 75% income as drawdown (Pot2) Thank you for explaining. Why the figure £4,190? 
Is it possible to take income (£12,570 pa within tax allowance) and more of the 25% tax free (pot1) in any one year? 
Sorry if I'm missing a point..

To make maximum use of your tax allowance without actually paying any tax, you want the 75% taxable income you withdraw to equal your tax allowance (which is usually £12,570). 
£12,570 is 75% of £16,760.  The difference of £4,190 is the corresponding 25% tax free portion. 

jim8888

Just for info, I was in a similar situation myself, taking a redundancy package at 57 (although I don't intend to return to work!) Like you, I first spent down the severance package and then took out some of my TFLS to cover the monthly budget until the new tax year in April. At that point, I started to drawdown £1047 a month from my own and my other half's DC pension pots (she retired too). The rest required to cover monthly expenses, I take from the TFLS. It's my intention to continue like this until I've exhausted the total TFLS that we are both allowed. I keep about two years of our required annual budget in cash, the rest remains invested. 
If I returned to work, the only "issue" I see is that any further pension contributions from employment would be restricted, as explained in this thread. But that would be nice problem to have, tbh. 

DeadlyD

jim8888 said:

Just for info, I was in a similar situation myself, taking a redundancy package at 57 (although I don't intend to return to work!) Like you, I first spent down the severance package and then took out some of my TFLS to cover the monthly budget until the new tax year in April. At that point, I started to drawdown £1047 a month from my own and my other half's DC pension pots (she retired too). The rest required to cover monthly expenses, I take from the TFLS. It's my intention to continue like this until I've exhausted the total TFLS that we are both allowed. I keep about two years of our required annual budget in cash, the rest remains invested. 
If I returned to work, the only "issue" I see is that any further pension contributions from employment would be restricted, as explained in this thread. But that would be nice problem to have, tbh. 

Thanks! I don't see that I will return to work in the immediate future, whilst I retrain so contributions aren't an issue. We will put in more to my husbands so he could retire early to enjoy retirement together (I'm 12 yrs older). So you didn't take a lump sum? What I want to understand is whether I can take the £12,570 allowance a yr and a lump sum from the 25% tax free pot - say £8k for a holiday / DIY / Car whatever when I want without paying tax. 

DeadlyD

p00hsticks said:

DeadlyD said:

phynix_uk said:

I agree with Audaxer, even if savings are available, you should consider drawing your personal income from your pension equal to the current personal income tax allowance of £12,570. To explain how drawdown works in a defined contribution (DC) pension:

You receive 25% tax free and 75% as income. In drawdown, you can stipulate how you draw funds from the pot meaning you can draw tax-free cash out on its own, income on its own or a combination.

Assuming you have no other taxable income, you can crystallise £16,760 of the pot. This 'benefit crystallisation even' will mean that of the £16,760, 25% is tax-free (£4,190) with the remaining 75% (£12,570) paid as income but equals your personal income tax allowance.

Ah so I can "use" both pots at the same time ie 25% of the tax free (Pot1) and 75% income as drawdown (Pot2) Thank you for explaining. Why the figure £4,190? 
Is it possible to take income (£12,570 pa within tax allowance) and more of the 25% tax free (pot1) in any one year? 
Sorry if I'm missing a point..

To make maximum use of your tax allowance without actually paying any tax, you want the 75% taxable income you withdraw to equal your tax allowance (which is usually £12,570). 
£12,570 is 75% of £16,760.  The difference of £4,190 is the corresponding 25% tax free portion. 

Thanks - where does the figure of £16,760 come from?  - sorry I'm confused

DeadlyD

Marcon said:

DeadlyD said:

phynix_uk said:

I agree with Audaxer, even if savings are available, you should consider drawing your personal income from your pension equal to the current personal income tax allowance of £12,570. To explain how drawdown works in a defined contribution (DC) pension:

You receive 25% tax free and 75% as income. In drawdown, you can stipulate how you draw funds from the pot meaning you can draw tax-free cash out on its own, income on its own or a combination.

Assuming you have no other taxable income, you can crystallise £16,760 of the pot. This 'benefit crystallisation even' will mean that of the £16,760, 25% is tax-free (£4,190) with the remaining 75% (£12,570) paid as income but equals your personal income tax allowance.

Ah so I can "use" both pots at the same time ie 25% of the tax free (Pot1) and 75% income as drawdown (Pot2) Thank you for explaining. Why the figure £4,190? 
Is it possible to take income (£12,570 pa within tax allowance) and more of the 25% tax free (pot1) in any one year? 
Sorry if I'm missing a point..

Yes. If you plan to return to work when you've retrained, do you plan to build up further pension benefits? If so, be aware that if you take any income except the 25% tax free cash from either DC pot, you will be limited to a maximum of £4,000 tax-relievable pension contributions a year (including tax relief on personal contributions, plus any employer contributions on your behalf) for every year thereafter.

Yes Marcon, thanks I understand contributions would be limited. So you are saying I can take the £12,570 or £16,760 tax free pa. PLUS any amount I wished from the 25% tax free portion (Pot2)? 

Marcon

DeadlyD said:

Marcon said:

DeadlyD said:

phynix_uk said:

I agree with Audaxer, even if savings are available, you should consider drawing your personal income from your pension equal to the current personal income tax allowance of £12,570. To explain how drawdown works in a defined contribution (DC) pension:

You receive 25% tax free and 75% as income. In drawdown, you can stipulate how you draw funds from the pot meaning you can draw tax-free cash out on its own, income on its own or a combination.

Assuming you have no other taxable income, you can crystallise £16,760 of the pot. This 'benefit crystallisation even' will mean that of the £16,760, 25% is tax-free (£4,190) with the remaining 75% (£12,570) paid as income but equals your personal income tax allowance.

Ah so I can "use" both pots at the same time ie 25% of the tax free (Pot1) and 75% income as drawdown (Pot2) Thank you for explaining. Why the figure £4,190? 
Is it possible to take income (£12,570 pa within tax allowance) and more of the 25% tax free (pot1) in any one year? 
Sorry if I'm missing a point..

Yes. If you plan to return to work when you've retrained, do you plan to build up further pension benefits? If so, be aware that if you take any income except the 25% tax free cash from either DC pot, you will be limited to a maximum of £4,000 tax-relievable pension contributions a year (including tax relief on personal contributions, plus any employer contributions on your behalf) for every year thereafter.

Yes Marcon, thanks I understand contributions would be limited. So you are saying I can take the £12,570 or £16,760 tax free pa. PLUS any amount I wished from the 25% tax free portion (Pot2)? 

You can take up to 25% from Pot 1, and up to 25% from Pot 2 tax free. Anything more than that is potentially taxable and would trigger the £4,000 per year limit on future pension contributions. 

Pat38493

DeadlyD said:

jim8888 said:

Just for info, I was in a similar situation myself, taking a redundancy package at 57 (although I don't intend to return to work!) Like you, I first spent down the severance package and then took out some of my TFLS to cover the monthly budget until the new tax year in April. At that point, I started to drawdown £1047 a month from my own and my other half's DC pension pots (she retired too). The rest required to cover monthly expenses, I take from the TFLS. It's my intention to continue like this until I've exhausted the total TFLS that we are both allowed. I keep about two years of our required annual budget in cash, the rest remains invested. 
If I returned to work, the only "issue" I see is that any further pension contributions from employment would be restricted, as explained in this thread. But that would be nice problem to have, tbh. 

Thanks! I don't see that I will return to work in the immediate future, whilst I retrain so contributions aren't an issue. We will put in more to my husbands so he could retire early to enjoy retirement together (I'm 12 yrs older). So you didn't take a lump sum? What I want to understand is whether I can take the £12,570 allowance a yr and a lump sum from the 25% tax free pot - say £8k for a holiday / DIY / Car whatever when I want without paying tax. 

The tax free 25% is completely irrelevant for tax purposes so in theory you can take out some or all of the 25% tax free amount.  You can then take an additional 12570 off from the taxable part of the pension which would be counted as “taxable income”, but you won’t pay any tax as it’s within your personal allowance.

The technicalities of whether you do that monthly or all in one big withdrawal and how, would depend on the processes of the pension company you are with, but this won’t change the tax situation as the HMRC only cares about what happened in each full tax year.

It’s just that as pointed out above, as soon as you take any of the taxable 75% out, you will won’t be able to pay much into your pension in future anymore as you will trigger the lower pension contributions limit (which cannot be undone).

I’m sure your IFA pointed this out in their report, and at the risk of stating the obvious, whatever you take out now for holidays and so on, will be taking money from the fund that you may be counting on to last for up to 40 years.  Generally, taking out large amounts in the early years of retirement has a bigger effect because you are losing the compounding effect of the invested amounts in all those future years.  Unfortunately this is the opposite of what a lot of people would like to do as they would like to spend more of their money when they are younger.

Albermarle

Although it has been mentioned a couple of times, just be clear that just because a way of withdrawing the money is allowed under pension/tax law, your provider(s) maybe be restricted in what they can do. Mainly due to older IT systems.

For example with an old pension , the only option may be to take the whole 25% tax free in one go.
Or maybe you can take the 25% tax free in stages, but no taxable income until you have taken all the tax free first.
A modern pension will normally allow a more flexible mix and match approach.

and 1 pot with St James Place (£150k) 
Normally any mention of SJP on this forum generates some 'comment'. Surprisingly no one has mentioned anything yet.
They are normally expensive and they have various ways of tying you into their products.
Also it seems a bit odd that you have an IFA and a SJP pension. Normally the two things are mutually exclusive. 

DeadlyD

Albermarle said:

Although it has been mentioned a couple of times, just be clear that just because a way of withdrawing the money is allowed under pension/tax law, your provider(s) maybe be restricted in what they can do. Mainly due to older IT systems.

For example with an old pension , the only option may be to take the whole 25% tax free in one go.
Or maybe you can take the 25% tax free in stages, but no taxable income until you have taken all the tax free first.
A modern pension will normally allow a more flexible mix and match approach.

and 1 pot with St James Place (£150k) 
Normally any mention of SJP on this forum generates some 'comment'. Surprisingly no one has mentioned anything yet.
They are normally expensive and they have various ways of tying you into their products.
Also it seems a bit odd that you have an IFA and a SJP pension. Normally the two things are mutually exclusive. 

Interesting. I think both are flexible but I will be checking. Yes I have seen comments about SJP previously, there was a number of colleagues that recommended the consultant at SJP and I felt I was misled as at that time I combined 2 old pensions with them on the basis I would be able to transfer a DB at a later stage but of course they weren’t able to do that. That’s why I had the IFA from Pensionhelp who undertook the transfer of the DB into my workplace pension with L&G. I guess ideally I should have them under one fund.