Tax free lump sum DC pension

jamesd

Given your other provision the plan to use the tax free Pension money to buy a car is quite tax efficient so not inherently bad.

However, you're old enough to get at pension money and you have other savings. Good strategy would normally involve using the savings to increase your pension contributions to the maximum allowed, so you can gain some money from the tax relief.

dunstonh

Is there any reason it wouldn’t be a good idea to withdraw my quarter tax free from my DC pension pot while still working and paying into the plan?

Or putting it another way, you are asking if you should rob your retirement years to pay for something during your working years?

That can be a good thing to do if its part of holistic planning and using multiple tax wrappers in an efficient way with justification.   However, if its on a whim for no particular reason or you would just stick it in a savings account that would be bad.     

Sunsh1ne54

LHW99 said:

MallyGirl said:

The MPAA cap is now £10k but it does not apply to DB pension contributions. Rather than figures you should think about the type of withdrawal.
Taking any size of tax free lump sum does not trigger MPAA
taking just 1 penny of taxable income (ie the 75% after the 25% tax free has gone) will trigger MPAA

And its the "tax free" bit that matters. You would request the tax-free amount, and then 3 x that would become "crystallised" and would be taxable in future.

So if you had £200k in the pension, and took a £25k tax-free sum for the car, you would be left (in the DC pension) with:

£75k crystallised money - all potentially taxable

£100k uncrystallised, from which you could take another £25k rax free at a later date.

What is in the pension would continue to grow tak free, but even if the crystallised amount grew to £100k, it would still all be taxable. If the uncrystallised grew to £120k, you would then be able to have an additional 25% of that (£30k) tax free.

If you take £1 of the taxable part, then you get caught by the MPAA

Thank you, that’s good to know!

Veteransaver

Albermarle said:

Veteransaver said:

Taking a lump sum now will restrict future pension contributions (to only £4k a year I think)

And once you trigger it you have to move the pension into a Sipp or annuity within 6 months believe.

This post is totally Inaccurate on both points. Just in case anybody else reads it.

Apologies, did that used to be the case or have the rules changed again?
What is to stop you taking the lump sum and recycling it back into a pension for more tax relief?

jamesd

Veteransaver said:

Apologies, did that used to be the case or have the rules changed again?
What is to stop you taking the lump sum and recycling it back into a pension for more tax relief?

Rules started changing in a big way in 2006 then another big lot in 2015. There are still some old pensions or ways of doing things where those restrictions can exist. Your misfortune was in large part the original post mentioning taking the quarter tax free and not the rest, which eliminated the MPAA case you wrote about.

Nothing to worry about.

There are some rules about pre-planned pension tax free lump sum recycling but those are intended to stop organised schemes. In practice, the Annual Allowance and a person's income limit the potential gain.

If they were being applied to individuals a sufficiently wealthy person can avoid being affected by the recycling-specific limits by increasing their pension contributions to the AA or income maximum and after a while recycle all they want because their contributions aren't increasing at all. But they can't dodge the AA. So that largely takes care of it.

Altior

There is the technical side of things which have been explained, and the real world side of things.

We save capital for security and to use at a later date. Far too many people spend too long in that mindset, and never actually start to enjoy the security that they have built up for themselves until it's too late, either to enjoy it or even survive long enough to use it.

If you'll get enjoyment, pleasure and other benefits from getting a new(er) car, go for it. And yes that should mean doing it in the most tax efficient way possible. 

Sunsh1ne54

Altior said:

There is the technical side of things which have been explained, and the real world side of things.

We save capital for security and to use at a later date. Far too many people spend too long in that mindset, and never actually start to enjoy the security that they have built up for themselves until it's too late, either to enjoy it or even survive long enough to use it.

If you'll get enjoyment, pleasure and other benefits from getting a new(er) car, go for it. And yes that should mean doing it in the most tax efficient way possible. 

Thanks Altior, I agree! My father died young and I have had cancer, I’m nearly 60.  I don’t want to draw out money just for the sake of it, I’ve thought long and hard. 😊