I am confused about the 25% Tax Free element of my pension

JillsBills

Hello,
I have a private / direct contribution pension and will potentially start drawing it down soon.

I keep being told that I can take a 25% lump sum tax free, and this morning read a Pensions advice article on Restless.Com that implied that any pension draw-down on top of the state pension that takes the total over the personal allowance will be taxed. 

Surely it is not fair that 25% drawn down gradually is taxed, whereas taken as a lump sum it is tax-free?

Has Restless got it wrong? Is 25% of any drawn-down amount tax-free?

Thank you.

RogerPensionGuy

https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/taking-your-pension-as-a-number-of-lump-sums

cloud_dog

You can tax up to 25% of your pension pots up to a maximum value of £268,275 (25% of the old LTA £1070100.)

The LTA itself is being abolish from 24/25 financial year (taxed at 0% for the remainder of 23/24FY)

xylophone

You can tax up to 25% of your pension pots up to a maximum value of £268,275 (25% of the old LTA £1070100.)

Take..............?

Linton

JillsBills said:

Hello,
I have a private / direct contribution pension and will potentially start drawing it down soon.

I keep being told that I can take a 25% lump sum tax free, and this morning read a Pensions advice article on Restless.Com that implied that any pension draw-down on top of the state pension that takes the total over the personal allowance will be taxed. 

Surely it is not fair that 25% drawn down gradually is taxed, whereas taken as a lump sum it is tax-free?

Has Restless got it wrong? Is 25% of any drawn-down amount tax-free?

Thank you.

You are confusing 2 separate things.  The tax free lump sum is always tax free.  If you want to take taxable money then this is added to your other taxable income (SP is taxable). If the total is more than you tax allowance then tax is due.

"Drawdown" can be used to mean accessing the taxable portion.

Newbie_John

This is better calculator:
https://www.direct.aviva.co.uk/myfuture/PensionWithdrawalTaxCalculator

But let's say you have 400k and want to avoid paying any taxes on it:
1) withdraw 25% = 100k first as your full allowance
2) keep withdrawing whatever is a tax free amount per year - £12570 (assuming no other income)

But I understand you need to speak with your pension provider first - so they don't charge you tax - as default seems to be 25% free and then the rest is taxable - this allows you to withdraw £16500 yearly tax free.

Albermarle

But I understand you need to speak with your pension provider first - so they don't charge you tax - as default seems to be 25% free and then the rest is taxable - this allows you to withdraw £16500 yearly tax free.
Two points here - Firstly you can talk to the provider about what method you wish to use to withdraw money from a pension. There is no default as such. Yes 25% is tax free and 75% taxable but  there are a variety of methods to mix and match this , some of which some providers offer and some do  not. 
 Secondly if there is some taxable income, the tax code given to the pension provider by HMRC will dictate how much tax is taken from taxable income. You talking to the provider directly will have no effect. If you want the tax code changed or get a rebate etc you need to contact HMRC and only once any pension payments are started.