Income tax on flexi drawdown pension
in Pensions, annuities & retirement planning
13 replies 440 views
Help please, I have a flexi drawdown pension & have already withdrawn 25% tax free. I watched Martin Lewis's programme on pensions - which appeared to tell me that if my current marginal rate of income tax is nil, then I should be able to withdraw the rest of the pot without paying income tax. Is this correct please? I emailed Pension Wise - who say I will have to pay tax. The low income tax reform website seems to confirm that I can withdraw the whole pot tax free. I am confused can anyone help please? I need to move quickly, as when my state pension rises in April I may be liable for income tax.
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You pay tax based on your annual taxable income with what type of income (pension, earnings, interest , dividends etc) being crucial.
If your pot is £8,000 and you have no other taxable income then no tax would be due.
If your pot was £80,000 and you had no other taxable income you would be paying basic and higher rate tax on it. But the first £12,570 would be covered by your Personal Allowance.
Many years ago, he told me that he cannot cover every scenario as his segments on each thing are short and he has to keep the presentation interesting so people don't lose interest. That is fair enough but in some areas, it can lead to misunderstandings or outcomes that are not optimal for everyone. The regulator has spent decades trying to find ways to deliver simplified advice that is right for everyone but has failed to do so. The best they can get to is about 2/3rds of the time it is right. And that is the problem when you try to simplify.
There is also the possibility that, with the speed he talks and the subject not being high in your areas of knowledge you may have misunderstood. For example, if you have unused personal allowance than drawing some of your pension would not be subject to tax. Did he say "some" or "all" [of your pension]?
It might have been better if Martin said that you'll just get taxed on it as though it was money you were being paid by an employer. Another simplification, but maybe one closer to hitting the nail on the head...