Tax on Returns on Funds Held in Drawdown - Newbie Q

zagfles

Scot_39 said:

zagfles said:

Scot_39 said:

Most of the general guides on drawdown talk simply about the initial 25% tax free and the 75% on capital then being locked in as future taxable income.

But not about the longer term.

But what happens with tax on future returns on the 75% of capital ?

So say 100k, get 25k tax free, and 75k fully taxable.

But that 75k stays invested - for n years and if it then grows to say 100k.

Does the additional earned 25k get any tax free allowance or is the 100k now all fully taxable ?

If taxable, isn't that then worse than not using drawdown ?

And say 4 25k ufpls - which would gain tax free 25% on returns on 75k, 50k and 25k over next 3 years be better than putting money into drawdown up front.  Edit At least from the point of view of tax on future Returns.

Any links to multiple ufpls vs long term drawdown tax scenarios ?

Why? If you pay tax now there is less to grow. Multiplication is commutative.

OK my perhaps crass reasoning for "isn't that then worse" ?

100k to get 4x25k earnings.  Taken including share of return annually for simplicity, 0 after 4 withdrawals.

Full crystallisation.

25k tax free lump sum
75k remains invested - say 5% return - 78.75 eoy.
take 1/3  - 26.25 k taxable.
52.5k remains invested - say 5% return - 55.125 eoy
Take 1/2 - 27.56k taxable
27.56k remains - 5% return - 28.94
Take 28.94 taxable

25k tax free, 82.75 taxable over the four years. 107.75 total

Ufpls

25k ufplus 6.25k tax free, 18.75 taxable
75k remains invested,....
26.25k ufplus, 6.56k tax free, 19.86 tax
...
27.56 ufplus, 6.89k tax free
....
28.94 ufplus, 7.25k tax free

26.94 tax free, 80.81 taxable, over 4 years.  107.75 total.
You keep 1/4 of the growth tax free too.

But that might all be my lack of understanding, so nonsense ???????

All ignoring what you do with the money once withdrawn.

Above gross.
Net obviously dependent on personal tax position and potentially govt tax policy over the 4 years.


It's not a big hit, and if need the extra cash, ....you make your choices, and pay the difference.

20% on 5% return, may be a lot less than say mortgage debt or diy/car loans etc.


Of course if investments fall, you win, but no one hopes for that in their pension.

That's where you're going wrong. There's no point comparing strategies unless you compare like with like. Same spending rate, rest invested, whether inside or outside the pension. If tax rates stay the same, if you can get growth outside the pension tax free (eg using ISAs, dividend/CGT allowances etc), the result will be the same. Multiplication is commutative. Investment x tax hit x growth = investment x growth x tax hit. It doesn't matter what order.