Small lump sums from drawdown

MikMikandThriceMik

I actually don't know what my tax code is. I know that the tiny £100/month nilgosc pension is already taxed at source and so is my salary.

I am in the process of transfering all pensions into lifesight which will then tally approx to the figure I mention above.

Yes, lifesight with current employer.

Thanks.

MikMikandThriceMik

xylophone said:

It is £210000

And this is the DC pension to which you refer?

If so, what do you mean by

I can't take lump sum cos DC pot is so small,

Oh, cos the pension is so small, I don't want to take lump sum which will decrease the pension even more. I have some savings so don't really need the lump sum. 
Thank you.

QrizB

MikMikandThriceMik said:

Oh, cos the pension is so small

What makes you think £210k is small?

MikMikandThriceMik said:

... I don't want to take lump sum which will decrease the pension even more. I have some savings so don't really need the lump sum.

So you can take the tax-free lunp sumand have it outside the pension tax-free, or you can decline the tax-free lump sum and have to pay tax on it.
Most people refer not to pay tax, but I guess that's up to you?

eastcorkram

QrizB said:

MikMikandThriceMik said:

Oh, cos the pension is so small

What makes you think £210k is small?

MikMikandThriceMik said:

... I don't want to take lump sum which will decrease the pension even more. I have some savings so don't really need the lump sum.

So you can take the tax-free lunp sumand have it outside the pension tax-free, or you can decline the tax-free lump sum and have to pay tax on it.
Most people refer not to pay tax, but I guess that's up to you?

Surely if you don't take the TFLS, then every withdrawal you make is 25% tax free anyway? 

xylophone

As things stand now, you are drawing both a salary and a small DB pension. 

Presumably you are able to check your monthly pension/ salary statements on the providers' websites.   These will show the tax codes applied to each.

You are aged 58.


You are in the process of transferring your old DC pensions into LifeSight (the current workplace scheme).

When the transfer process is complete, your LifeSight pension will be worth approx £210,000.

Is  it now your intention to retire fully and live on savings/DB pension/drawdown from LifeSight (supplemented by full new state pension at whatever rate then applicable when you reach age 66)?


https://www.lifesight.com/about-lifesight-spending

Above indicates that  full flexible access  is offered when you access your LifeSight pension.

Or you could transfer LifeSight to another provider offering flexible access.

You might opt to take a 25% tax free Pension Commencement Lump Sum from LifeSight - all withdrawals after that would be taxable as income in the year of receipt.

Another option would be UFPLS as explained here.

https://www.unbiased.co.uk/discover/pensions-retirement/managing-a-pension/what-is-an-uncrystallised-funds-pension-lump-sum-ufpls

According to the LifeSight web page,  help and guidance is offered to members.

 https://www.lifesight.com/member-faq#:~:text=How much will I get,be worth when you retire.

1. The award-winning LifeSight ageOmeter tool helps you to see the bigger picture of your retirement savings and understand when you might be able to afford to retire.
2. It’s simple to use; everything you need is online. But if you do need more help, we have a team ready to take your specific questions.
3. Personalised communications direct you on your member journey at a time when you most need them.
4. A free advice service at retirement for LifeSight Savings members.
5. The ability to access your savings through LifeSight Spending.
6. LifeSight’s Independent Trustee board oversee the management of LifeSight to maintain and evolve a high quality product that works to deliver better member outcomes.

MikMikandThriceMik

@xylophone
I wasn't sure about if I had to take 25% lump sum tax free or whether I could take monthly amounts, 25% of which are tax free as said by somewhere on moneyhelper. I think that is the UFPLS you are talking about.
You have cleared it up for me though.

I want to retire at 59 in 5 months.
SP kicks in at 67.
Lifesight spending planner says I can have drawdown of approx £18000/yr until I reach my mid 70s. I can also put a bit to that every month from savings. I don't expect to live that long, too many health issues. Not investigated annuity yet cos Ibave to get medical details from doctor.

If I am taxed at source and am under the 40% tax bracket and not likely to breach it,do I have to inform HMRC about getting a small pension along with my salary?

Also since I am taking the small DB pension, should I have told HR in the company I work for or lifesight in case I have to be moved onto MPAA, and what is the threshold for MPAA? If it is £10K, I'm sure not paying that much into my pension per year. Or is MPAA for DC pensions only?

I think the following is what I was trying to work out earlier:
I take a pension of £12569 / year which is not taxed. I take the 25% lump sum tax free. I use that 25% lump sum at approx£6000 per year. It'll be nearly 8 years before the 25% runs out so no tax for this length of time.
Or I do that UFPLS and just leave the money in, and take the 25/75% split in £18000 chunks until the 25% runs out.

Gawd, there are nearly as many options as mobile phone contracts.


Thank you everyone for all your expertise.

xylophone

Have you checked your tax codes on your salary and pension payslips?

When you start to take your DC pension,  HMRC should provide the pension payroll with a tax code which takes account of the other income.

It may be that you would wish to contact HMRC about the way your personal allowance is allocated.

For example, you might request that the whole of the personal allowance is allocated to the highest income.

Let's take a person with a gross DB pension of £2000 a year and a DC pension of £18,000 a year and no other taxable income at all.

His PA could be allocated to the DC so that he is taxable on  £5, 430 of that income and then on the whole of the DB pension.

Let's say that after eight years he reaches SPA and by this time his DB pension is worth £2,500 a year and he is still drawing £18,000 from the DC pension.

Let's say  that the state pension is  eg £11,000 a year. Let's say that the PA is still £12,570.

The SP is paid gross so the tax code on the DC pension will reduce - only £1570 of the DC pension will be tax free with balance taxable at 20%.

The whole of the DB pension remains taxable at 20%.

Once you have no relevant earnings, it  will still  be possible (up to age 75) to make a net contribution of up to £2880 per tax year to a personal pension and receive tax relief of up to £720.

MikMikandThriceMik

@xylophone

My Work salary tax code is 1257L

My DB Pension tax code is BR.

Are these examples correct that I have made up?

*Taking 25% lump sum or whatever I can take tax free:

*£213000 total Pension amount.

*£18200 / year pension is wanted.

*Child Maintenance 12% of income before tax. (no overnight stays).

I am taking the 25% tax free amount (Minus the lump sum from the DB pension last August), 

so this taxfree lump sum will not figure in the amount of pension I will withdraw on a monthly basis. This taxfree lump sum equates to approx £43000.

I withdraw £10000 per year from the 75% and £8200 per year from savings until the £43000 is mostly spent(5 years).

So the figure per month will be something like:

(((10000-(10000*0.12))+8200)/12) = £1416.67 / mnth

Since I am withdrawing only £10000, which is less that £12570 for the first 5 years, I pay no tax. 

Of course I will be hit with tax after that, but wont have CM to pay in 5 years.

75% of pension left over = £170000.

First 5 years, withdrawed £50000 as taxable pension. 170000-50000 = 120000

3 more years before SPA at £18200 / year = £54600

*These 3 more years (No CM) at ((18200-12570)*0.8)+12570) = £17074 Equiv to £1422 / mnth

120000 - £54600 = £65400

*What I need minus SP = £18200 - £10636 = £7564

£65400 / £7564 = 8.6 More years.

5Years + 3Years + 8.6Years = 16.6 Years From aged 59, taking state pension into consideration.
CM payments for the first 5 years will be a lot less than Drawdown Only below. Approx (10000*.12) = 1200 / year.

Just taking £18200 as drawdown. No tax free:

£18200 / year pension is wanted.

Child Maintenance 12% of income before tax. (no overnight stays).

(((((18200*.88)-12570)*0.8)+12570)/12) = £1277.23 / mnth

*After 5 years No CM: 

*After these 5 years, these 3 more years (No CM) at ((18200-12570)*.8)+12570) = £17074 Equiv to £1422 / mnth

8 years until SPA = 8 * 18200 / year = £145600

213000 - 145600 = £67400

*What I need minus SP = £18200 - £10636 = £7564

£67400 / £7564 = 8.9 More Years.

8 + 8.9 = 16.9 Years From aged 59.

Looks like drawdown tells me approx 16.9 years if no gains from investing doing it this way, taking state pension into consideration.

But I lose approx £139/month doing it this way paying extra CM for the first 5 years, which is partially made up for by having another 0.3 of a year where I still get this £1422 / mnth  pension.
I think therefore there is left an approx £5000 negative difference doing it drawdown only.
CM Payments for the first 5 years will be (18200*.12) = £2184

Apologies if this is long winded, there is probably a much eaasier way of calculating it.

QrizB

MikMikandThriceMik said:

Child Maintenance 12% of income before tax. (no overnight stays).

Does thie ever end? Eg. when the child reaches adulthood? How long is that?

£18200 / year pension is wanted.

After tax, I assume (noting that you hope not to pay tax for the first 5 years).

I am taking the 25% tax free amount (Minus the lump sum from the DB pension last August),

Why specifically minus the DB lump sum? Are they not two separate schemes? If so, your DC 25% TFLS is independent of the DB PCLS.

£213k DC would normally mean £52500 TFLS, £157500 crystallised & taxable.

I withdraw £10000 per month from the 75% and £8200 per year from savings until the £43000 is mostly spent(5 years).

If you have no other taxable income, it would usually be better (you'd pay less tax overall) to take £12570 from the pension and £5630 from savings. If your £43k is really £52.5k, you could take £5630 every year until your state pension is paid and still have some left.

MikMikandThriceMik said:

Just taking £18200 as drawdown. No tax free:

If you took £18200 as UFPLS each year, 25% of it (£4550) would be tax-free. The remaining £13650 would be taxable, but you'd only pay tax on £1080 of it. That's £216 in tax.

xylophone

At the moment, your Personal Allowance is given against your salary which means that  you are taxed on your income over £12,570.

Your modest DB pension is all taxed at basic rate, (20%).


You have brought your old  local government deferred pension into payment and taken the maximum lump sum available.

It seems very unlikely that this was so high as to affect your entitlement to a full 25% tax free lump sum from `LifeSight if you chose to go that route?

https://www.ftadviser.com/pensions/2023/03/15/budget-2023-chancellor-caps-pension-tax-free-lump-sum/

If you chose to take only the full PCLS from LifeSight as soon as you  you retire, would your only income then be your very small Local Government pension and interest from savings?

How would this affect your Child Maintenance liability?

• A person whose only  income was eg a gross pension of  £1500 a year could  earn over £17,000 in savings interest and pay no tax.
  
  https://www.gov.uk/apply-tax-free-interest-on-savings
  
  The lump sum and small pension could cover your living expenses for up to three years at which time you could access the remainder of the DC pension as required?
  
  At that point your pension company would be given a tax code - presumably you would choose to have the whole of your PA against the DC pension.
  
  Had you considered taking the advice and support offered by LifeSight?