Money moved to drawdown - is investment growth of the 75% taxable portion, taxable? 10 February at 10:01AM edited 10 February at 11:41AM in Pensions, annuities & retirement planning 15 replies 1K views

GazzaBloom

I've asked this before but still not clear on the answer. Here's a scenario and question involving moving a DC pension into drawdown.

Let's say you have £200,000 accumulated in a workplace DC pension.

You decide to take £25,000 tax free lump sum, so, £100K is moved into the drawdown account (£25K tax free + £75K taxable at your applicable tax rate after tax free allowance) and £100K remained uncrystallised in the original pension account.

You withdraw your £25K tax free sum into your bank account and leave the rest untouched for a year, so you have £100K in your uncrystallised account and £75K in your drawdown account which is taxable whenever you decided to draw from it. You decide to invest both amounts in the same fund. 

So far, so good?

For arguments sake, let's say the remaining money grows by 10% over 12 months so you now have £110K uncrstallised and £82,500 in your drawdown account.

25% of the uncrystallised amount (now £110K) remains able to be drawn tax free = £27,500 - correct?

Here's is my question - how much of the £82,500 in the drawdown account is taxable [Edit] on withdrawal [Edit]? Is it the original £75K or the full £82.5K? i.e. is investment growth on the taxable amount that has been crystallised taxable or tax free at the point of withdrawal?

Pat38493

I asked this question a while back and the answer given was that the growth on the part that's already crystallised is all taxable.  

I think it was maybe stated that different pension providers might handle this differently - some might track it entirely as if it's 2 separate accounts, others might apply some kind of percentage rule.

zagfles

There's no tax on the growth inside the pension, but anything you withdraw from the crystallised portion is taxable.

If you're thinking "why not withdraw it and put it in an ISA then" you're probably not thought it through - but it can be worth doing it some situations if you'll pay a lower tax rate now than in the future, for instance if you have spare personal allowance or if you might use up your whole basic rate band in the future.

dunstonh

Here's is my question - how much of the £82,500 in the drawdown account is taxable?

none of it.  Whilst the money is in the pension wrapper, it is free of tax.

Pat38493

dunstonh said:

Here's is my question - how much of the £82,500 in the drawdown account is taxable?

none of it.  Whilst the money is in the pension wrapper, it is free of tax.

I took his question to mean whether it was taxable by income tax on withdrawal.

GazzaBloom

Pat38493 said:

dunstonh said:

Here's is my question - how much of the £82,500 in the drawdown account is taxable?

none of it.  Whilst the money is in the pension wrapper, it is free of tax.

I took his question to mean whether it was taxable by income tax on withdrawal.

Thanks yes, that's what I was getting at, is it taxable on withdrawal

GazzaBloom

dunstonh said:

Here's is my question - how much of the £82,500 in the drawdown account is taxable?

none of it.  Whilst the money is in the pension wrapper, it is free of tax.

Yes sorry, I will edit the question above, taxable on withdrawal is what I was referring to.

GazzaBloom

Leads me to the conclusion that it's best to only crystallise what you need to, when you need to, and leave as much uncrystallised for as long as possible if it's invested, pending any LTA concerns.

dunstonh

GazzaBloom said:

Leads me to the conclusion that it's best to only crystallise what you need to, when you need to, and leave as much uncrystallised for as long as possible if it's invested, pending any LTA concerns.

Correct.   Do not crystallise anything unless there is a justification for doing so.

Expotter

Does it follow then, that if you only withdraw UFPLS amounts from your DC pension, any future growth will still be 25% tax free at the point of withdrawal?

GazzaBloom

Expotter said:

Does it follow then, that if you only withdraw UFPLS amounts from your DC pension, any future growth will still be 25% tax free at the point of withdrawal?

That has been my understanding but confirmation from someone more knowledgeable would be good.