25% tax free calculation when taken in drips

paddysreturn

Hi, 

Can someone let me know how the tax free lump sum is calculated when not taken all at once? Is my tax free figure set in stone from the moment I first make any withdrawal or is it dynamic in relation to the pot size?

For example, if I have 100k and withdraw 5%, is my total tax free allowance set at 25k or could it be greater if the remaining 95k continued to grow?

Thanks

Dazed_and_C0nfused

Is the 5% all TFLS or part TFLS and part taxable income?

Pat38493

paddysreturn said:

Hi, 

Can someone let me know how the tax free lump sum is calculated when not taken all at once? Is my tax free figure set in stone from the moment I first make any withdrawal or is it dynamic in relation to the pot size?

For example, if I have 100k and withdraw 5%, is my total tax free allowance set at 25k or could it be greater if the remaining 95k continued to grow?

Thanks

Firstly, it depends how you take the 5% out.  Theoretically you could take out 5% of your tax free amount (all tax free), or you could take out 5% with 25% of the 5% being tax free and the rest taxable (depending also on what the pension company you are actually with can accommodate administratively).

The complexity is that when you take out the tax free money, you "crystallise" the corresponding amount of remaining taxable in the pension fund.

Therefore if I assume you want to take out 5% all tax free (5K), you would have crystallised £20K, so remaining in your pension fund would be 15K of crystallised funds (which are all taxable when you take them out), and £80K of uncrystallised funds.

You can still take 25% tax free out on the uncrystallised part and also on any future growth in that part, but not on the crystallised part (at least that's how I understand it).  So if that 80K grew to 100K, you could then take out £25K further tax free income.

The bit I can't remember for sure which I'm sure someone will correct is the future growth on the 15K of crystallised funds - e.g. if that 15K grew to 16K, can you take 25% tax free of the 1K growth there -that part I can't quite remember.

Also, if you continue to pay in, you can take out 25% of that tax free later as well.

So yes your tax free amount could become greater as you add further contributions or it grows, but it's a bit more complicated than what you said.

Also - please note that if you consider to take the other option (part tax free part taxable), this is usually not a good idea if you are still working and putting into any pension scheme because as soon as you draw flexible taxable funds from the scheme, you will limit your future pension contributions to 4K per year for the rest of your life as you have "triggered" the lower limit on pension contributions.

Albermarle

OP - As above, you need to understand the concept of crystallisation of your pension funds. Then it will all be clearer.

The bit I can't remember for sure which I'm sure someone will correct is the future growth on the 15K of crystallised funds - e.g. if that 15K grew to 16K, can you take 25% tax free of the 1K growth there -that part I can't quite remember.

You can only get tax free cash by crystallising uncrystallised funds. So no you can not take tax free cash from growth in crystallised funds.

paddysreturn

Thank you Pat et al for the explanations. Apologies for not being clear in the original post but the assumptions were correct that I was referring to the whole withdrawal being tax free.

The answers are very clear and what I was expecting (hoping) to be the case.

Also, very clear on not withdrawing any taxable income while I’m still working.

Thanks again