Drawdown / option to defer 25% tax free portion?

FritterAndWaste

Hello.
I am in a position where I can, in theory, start drawing from a private (Aviva) pension but I don't fully understand how this works with regard to tax free drawings. I appreciate that I can elect to take 25% of the pension value as a single large (or multiple smaller) lump sum(s) and pay no tax but I am not interested in that option initially as I am not yet drawing state pension and so have no other taxable income.

I guess my key question is what happens if the drawing would be tax free anyway because it does not exceed my £12k personal allowance?  So suppose I have a £100k pension fund (hence with £25k available tax free), no other income and my first drawing from the pension is £10k. Does that £10k withdrawal reduce my £25k tax free "component" to £15k even though it would pay no income tax on it anyway because I have not exceeded my personal allowance or can I elect to say "I want to take the tax hit on this withdrawal and keep my £25k tax free portion unaffected" (because there will be no tax to pay!)?

Thank you.

Albermarle

Your pot is currently 'uncrystallised'
When you want to withdraw from it, you have to crystallise all or part of it.
Of the amount crystallised, 25% is tax free and the rest is taxable ( if you actually pay tax on it depends on you other income etc)
So for example of you crystallise £40K, the £10K is paid as tax free cash and £30K remains as a crystallised pot. You can take from that pot, or just leave it . Or take tax free cash and taxable income at the same time.
There are various ways to do it.
You would probably benefit from this free service that can explain your options
Pension Wise: free pension guidance | MoneyHelper

Linton

The 25% tax free is completely separate to the tax system, so if the 25% tax free was your total income in a tax year the benefit up to your tax allowance would be lost.

Better to take the 25% + upto £12570 of your taxable pot and not pay any tax.  Any extra money taken can be put into an S&S ISA using much the same investments as in your pension if that is what you want.

dunstonh

Any unwanted 25% TFC can always be put back into the pension upto £2880 (to maximise the £3600 non earners allowance).  Any excess above that can go into an S&S ISA to keep the tax free cash tax free.

FritterAndWaste

Thank you for your replies, musch appreciated. I think I get it now!

older_and_no_wiser

This has always been the question I struggle with. ie. what is the most tax efficient/beneficial way of withdrawing from my DC SIPP. As an example:

If I retire from work age 58/59 with a £400,000 SIPP. At that point I could take £100,000 tax free. I don't want/need that amount initially. I may need £20,000 each year for my living expenses etc.

It sounds like the best option is to take the full £100,000 tax free amount. Keep £20,000 in easy access savings for my first year's living expenses.

I now have £80,000 left of the tax free portion. £20,000 could be put into an S&S ISA (back into investments as previously suggested). What would be the recommendation for the remaining £60,000? Maybe put it into a non ISA investment account with the aim of transferring across £20,000 each tax year into an ISA wrapper?

It seems so much easier accumulating than decumulating. ;-)

older_and_no_wiser

...I should add that at the point of retiring, I should also have around £40,000 in cash savings and another £100,000 in S&S ISAs. So I have options with where to access money from. I just want to minimise the tax I pay on SIPP access. 

Albermarle

 I just want to minimise the tax I pay on SIPP access. 

Once you retire you still have your annual personal tax allowance £12570 ( assuming no other taxable sources of income)
So you should use this, otherwise you lose it.
This will mean taking this amount of taxable income from your SIPP each year, until you start getting the state pension.

You could do this by taking the full tax free cash as you have said and then living off a mixture of this £12570 taxable annual income ( but not actually paying any tax)  and topped up with  tax free cash, savings etc.

Or you could leave most of the tax free cash in the pension and just take out enough, to crystallise sufficient taxable income to take £12570.

The main point is that for the 9 years between retiring and getting the state pension, you do not waste your personal allowance each year.