Lump sum tax implications.

Andyaero

I'm going to hit 55 in May and have a plan that requires an amount from a  pension pot.
I will require £160k from the pot which contains £282k.
Could those more knowledgeable than I check my maths done via a pension calculator. I will be taking advice so not jumping into this blind.

Now, I will have no earnings in tax year 23/24 or 24/25. So if I take the £160k in one hit, which means I believe, I will need £207.5k from the pot, as after receiving the £70.5k tax free amount, there will be £47.5k tax payable.

Other option is I take £120k, giving me £112.5k after 7.5k tax. Then in April '24 I take a further £55k, giving me £49k after 6k tax. 

The 2nd option means I have achieved my c£160k paying £13.5k tax, instead of £47.5k, a saving of £34k by waiting a year fir my total sum.

Is this how it works? Feels a bit tgtbt, and that usually means it is.
Thanks for any help.

Dazed_and_C0nfused

Now, I will have no earnings in tax year 23/24 or 24/25. So if I take the £160k in one hit, which means I believe, I will need £207.5k from the pot, as after receiving the £70.5k tax free amount, there will be £47.5k tax payable.

Other option is I take £120k, giving me £112.5k after 7.5k tax. Then in April '24 I take a further £55k, giving me £49k after 6k tax. 

Where are you getting £47.5k tax payable from?

Are you referring to the tax the pension company will deduct or the actual tax ultimately payable?

Same with the second set of figures, £7.5k on £120k and £6k from £55k don't make sense.

Maybe you could be a bit clearer about what you mean with each of the three options, specifying the tax year, any TFLS element and taxable amount?

Bimbly

Are you planning to work again in the future (or are continuing to work) and to make further pension contributions? If so, after taking a taxable amount from your pension pot, you will be limited to adding £4,000 per year into a pension. Hence limiting your ability to save more for your retirement with the associated tax relief and employer contributions.

This is called the MPAA, if you want to read more about it. Just taking the tax free amount does not trigger the MPAA.

leosayer

Needing to withdraw such a large % of your pension the moment you hit 55 does raise some red flags.

How will this withdrawal impact your retirement income needs and plans?

Do you want to share details of your plan? It's possible that forum members have experience that will offer more efficient means of achieving what you want. 

Albermarle

Taking all this money out at once ( or twice) means decimating your retirement pot, and paying a lot more tax than necessary. Hopefully it is a very good plan you have.

Andyaero

Thanks for everyone's help, will answer all this later today. Basically I'm trying to figure out how to take as close as I can to £160k in the next 2 tax years without going into 40% tax. No red flags or concerns needed, I have retired, tho not taking an income, we have enough to live on via my wife's company income. The pension is from a company I worked for in the past and there are no contributions going into it any longer. I'm getting a boat built and seeking to fund the remaining £160k as tax efficiently as possible, I accept there is going to be 20% tax incurred.

Andyaero

Is it correct that if I take a second lump sum in the 24/25 tax year, I can take 25% of the remaining pot tax free again......provided Scottish Widows allows this?

Bimbly

Andyaero said:

Is it correct that if I take a second lump sum in the 24/25 tax year, I can take 25% of the remaining pot tax free again......provided Scottish Widows allows this?

No.

25% of the whole pot is tax free, 75% is taxable. 

You have £282k in your pot, of which 25% would be £70.5k. If you take half of your tax free amount in Year 1, £35.25k, then the rest of the half, £105.75 will be crystallised - this will then be taxable whenever you take it out (141 is half, 25%=35.25, 75%=105.75). Repeat that in Year 2.

Alternatively, you could take £70.5k as your 25% tax free amount in one go, crystallising the rest which will be taxable whenever you take it out. You can split this across tax years to stop you going up a tax bracket and/or to take advantage of your tax free allowance, but it will always be taxable.

Andyaero

Bimbly said:

Andyaero said:

Is it correct that if I take a second lump sum in the 24/25 tax year, I can take 25% of the remaining pot tax free again......provided Scottish Widows allows this?

No.

25% of the whole pot is tax free, 75% is taxable. 

You have £282k in your pot, of which 25% would be £70.5k. If you take half of your tax free amount in Year 1, £35.25k, then the rest of the half, £105.75 will be crystallised - this will then be taxable whenever you take it out (141 is half, 25%=35.25, 75%=105.75). Repeat that in Year 2.

Alternatively, you could take £70.5k as your 25% tax free amount in one go, crystallising the rest which will be taxable whenever you take it out. You can split this across tax years to stop you going up a tax bracket and/or to take advantage of your tax free allowance, but it will always be taxable.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/taking-your-pension-as-a-number-of-lump-sums#:~:text=Each time you take a,future withdrawals aren't guaranteed.

The above doesnt make your point clear tho. In fact it specifically states each withdrawal is 25% tax free. Tho, I'll admit I may be misunderstanding!

 Anyway.......Thought it sounded too good to be true. So builder won't be able to start until Dec, so how's my maths here.....

1.Using today's figures pot will be £284k in May, we'll use that as the total, whatever its gained ( hopefully) by Dec is a bonus.
2.Take tax free sum of £71k.
3. Also take £28k which totals £99k and so maintains my £12570 allowance.

**on 2nd thoughts, do I have to limit myself to this £99k in order to keep the zero tax allowance, as the £71k doesn't count as income for tax purposes? **
 

4. £3086 tax @ 20% is payable on this £28k
5. I will receive £96k.

6.In April 2024, I will require £64k.
7. I take £50k in order to remain under the 40% tax bracket.
8. £7540 tax @ 20% is payable on this £50k.
9. I will receive £42460.
10. I will have paid £10626 tax on £149k.
11. I have received £138460
12. I have a shortfall of £21540 to be found from other savings/sell possessions or a kidney.

Is this the most efficient way of getting as close to my £160k by April 2024 without hitting the 40% tax rate?

draiggoch

Just take £50,000 in years 1 and 2. This along with the initial 25% tax free £71000 will give you near enough £156,000 after tax. Paying about £15000 in tax 

Andyaero

I think with my edit above, I just figured that out at the same time you were posting! 
 
Thanks!