Timing of drawdown to avoid tax question

handful

I am retiring in April and plan to drawdown the maximum I can to use up personal allowance for both myself and OH and then top up the required spending funds from other savings.

I know I can draw using £16,666 UFPLS but I remember seeing something about avoiding taking this in April to avoid getting hit with a tax deduction that eventually gets given back as a rebate. Can someone point me in the right direction please? I don't need to take the UFPLS in April, I could wait for a month or two if necessary if that's the simple was to avoid the tax hit? Do I have to do 2 x UFLPS withdrawals, one small one to get a new tax code followed by another one to make up the full £16666 amount? 

For info, I am currently a HR tax payer with a tax code that takes into account my contributions and TR for the HR contributions. My plan is to keep the money from both UFPLS withdrawals in a Marcus account and pay ourselves an income from there. Or alternatively into our ISAs but there seems little point doing this if we need to draw these funds throughout the year.

Also, by the time my OH reaches SP age she will have depleted her pension close to completely. I see this as a good thing because it means we've taken all her pension out without paying any tax and she will still have some savings outside on a pension wrapper to draw on if required. Am I right in thinking this or am I missing something? We will also be making a £2880 contribution back into each of our pensions to benefit from the TR taking it up to £3600.

 

Thanks

Marcon

handful said:

I am retiring in April and plan to drawdown the maximum I can to use up personal allowance for both myself and OH and then top up the required spending funds from other savings.

I know I can draw using £16,666 UFPLS but I remember seeing something about avoiding taking this in April to avoid getting hit with a tax deduction that eventually gets given back as a rebate. Can someone point me in the right direction please? I don't need to take the UFPLS in April, I could wait for a month or two if necessary if that's the simple was to avoid the tax hit? Do I have to do 2 x UFLPS withdrawals, one small one to get a new tax code followed by another one to make up the full £16666 amount? 

For info, I am currently a HR tax payer with a tax code that takes into account my contributions and TR for the HR contributions. My plan is to keep the money from both UFPLS withdrawals in a Marcus account and pay ourselves an income from there. Or alternatively into our ISAs but there seems little point doing this if we need to draw these funds throughout the year.

Also, by the time my OH reaches SP age she will have depleted her pension close to completely. I see this as a good thing because it means we've taken all her pension out without paying any tax and she will still have some savings outside on a pension wrapper to draw on if required. Am I right in thinking this or am I missing something? We will also be making a £2880 contribution back into each of our pensions to benefit from the TR taking it up to £3600.

 

Thanks

Make one very small drawdown which will be taxed at emergency rate by your provider. That will trigger the issue of a tax code from HMRC to your provider, which will then avoid the emergency code being applied to future drawdowns (but you need to wait until you know the code has been issued to make the second and subsequent drawdowns).

Linton

Pension payments beyond the 25% tax free are taxed under PAYE in exactly the same way as wages.

The suggestion is not "avoid taking a large taxable lump sum in April" but rather do take it in March since by then you will have accumulated all your tax allowances or tax bands.  PAYE works by adding 1/12th to the running total of your allowances and tax band levels each month.

However your first ever payment from a new income stream is taxed under emergency taxation rules since HMRC dont know you have a new "employer" and so wont have issued the right tax code for your circumstances.  I thought the emergency code was 1257 X,1257 W1 or 1257 M1.  In all these  cases  your lump sum will be taxed purely on the allowances/bands  for that month ie 1/12th of the total.  This could easily put your into the higher rate tax band (or beyond).

However I seem to remember reports from some people where it has not worked out like that,

handful

Marcon said:

handful said:

I am retiring in April and plan to drawdown the maximum I can to use up personal allowance for both myself and OH and then top up the required spending funds from other savings.

I know I can draw using £16,666 UFPLS but I remember seeing something about avoiding taking this in April to avoid getting hit with a tax deduction that eventually gets given back as a rebate. Can someone point me in the right direction please? I don't need to take the UFPLS in April, I could wait for a month or two if necessary if that's the simple was to avoid the tax hit? Do I have to do 2 x UFLPS withdrawals, one small one to get a new tax code followed by another one to make up the full £16666 amount? 

For info, I am currently a HR tax payer with a tax code that takes into account my contributions and TR for the HR contributions. My plan is to keep the money from both UFPLS withdrawals in a Marcus account and pay ourselves an income from there. Or alternatively into our ISAs but there seems little point doing this if we need to draw these funds throughout the year.

Also, by the time my OH reaches SP age she will have depleted her pension close to completely. I see this as a good thing because it means we've taken all her pension out without paying any tax and she will still have some savings outside on a pension wrapper to draw on if required. Am I right in thinking this or am I missing something? We will also be making a £2880 contribution back into each of our pensions to benefit from the TR taking it up to £3600.

 

Thanks

Make one very small drawdown which will be taxed at emergency rate by your provider. That will trigger the issue of a tax code from HMRC to your provider, which will then avoid the emergency code being applied to future drawdowns (but you need to wait until you know the code has been issued to make the second and subsequent drawdowns).

Thanks Marcon. When you say very small, would say £1000 on an UFLPS (£250 TF) be ok and would HMRC issue a tax code on that basis? Or should I make it even smaller?

handful

Linton said:

Pension payments beyond the 25% tax free are taxed under PAYE in exactly the same way as wages.

The suggestion is not "avoid taking a large taxable lump sum in April" but rather do take it in March since by then you will have accumulated all your tax allowances or tax bands.  PAYE works by adding 1/12th to the running total of your allowances and tax band levels each month.

However your first ever payment from a new income stream is taxed under emergency taxation rules since HMRC dont know you have a new "employer" and so wont have issued the right tax code for your circumstances.  I thought the emergency code was 1257 X,1257 W1 or 1257 M1.  In all these  cases  your lump sum will be taxed purely on the allowances/bands  for that month ie 1/12th of the total.  This could easily put your into the higher rate tax band (or beyond).

However I seem to remember reports from some people where it has not worked out like that,

Thanks. I could do that I guess, live off savings and do a drawdown towards the end of the year which can then go towards next year's spending requirement.

xylophone

Are you saying that your wife has a pension that she has not yet accessed and either is (or will be) a non earner from 6 April onwards?

You, too, will be a non earner and will be living on pension plus savings income?

What would be the situation if rather than UFPLS, you each took the maximum 25% tax free PCLS and deposited  it in Marcus accounts,

leaving the rest of the pension invested?

How long would it cover all your expenses before you then had to access the pensions?

What would be the taxation of interest situation ?

molerat

You can take £1397 for a first dip.  25% will be tax free, £349.25, with the remaining £1047.75 within the monthly £1048.25 tax allowance of the 1257M1 emergency tax code.  HMRC will then allocate a tax code and you can make further withdrawals based on that.  If you intend to take the whole of your £12570 tax allowance, £16760 total including the 25% TFLS, you will have to wait until March to take the remainder or take monthly £1397, or multiples according to the month, withdrawals.

NoMore

Is it really that difficult to just take what you want and then use a P55 form to claim back your tax. AIUI it should be returned within 6 to 8 weeks (willing to accept I might be wrong on the timescales).

handful

xylophone said:

Are you saying that your wife has a pension that she has not yet accessed and either is (or will be) a non earner from 6 April onwards? 

Yes

You, too, will be a non earner and will be living on pension plus savings income? 

Yes

What would be the situation if rather than UFPLS, you each took the maximum 25% tax free PCLS and deposited  it in Marcus accounts, 

I guess I could do that but 25% would be circa £120k for me and £30k for the OH and I want to keep more invested because we have circa £100k in bonds and fixed savings and around £80k in ISAs

leaving the rest of the pension invested? 

But by taking the maximum tax free each year will keep more invested?

How long would it cover all your expenses before you then had to access the pensions? 

Surely I should be taking at our PA out of both pensions at the very least? 

If we do that the savings will last until a small DB and SP kicks in for both of us. Which means if I've taken all the TFC out, everything I draw down will subject to BR tax. This is why I think I'd rather take UFPLS rather than crystallise the who lot and take the TFC in one go.Obviously I realise the cash will keep us going for a few years to top up the drawdown.

What would be the taxation of interest situation ?

I guess that may be an issue with some of the investments not in a tax free wrapper already.

ader42

I think some pension providers let you set up a monthly drawdown, so could that be £1397 per month from April? 
Would that give HMRC enough time to issue the correct tax code after the first payment? 

Or does a monthly withdrawal have to be non-UFLPS? i.e. drawdown from a crystallized “pot”. 
It might depend on what your pension provider can facilitate? 

The theory of keeping more invested for longer (kicking the tax can down the road if you can) is sound imho. unless LTA may become an issue and unless of course you want to for example simply move money from your pot to hers to redress any imbalance - assuming she has relevant earnings to enable this (pay 20% tax on withdrawal from yours then get 25% tax relief on deposit in hers). 

handful

ader42 said:

I think some pension providers let you set up a monthly drawdown, so could that be £1397 per month from April? 
Would that give HMRC enough time to issue the correct tax code after the first payment? 

Or does a monthly withdrawal have to be non-UFLPS? i.e. drawdown from a crystallized “pot”. 
It might depend on what your pension provider can facilitate? 

The theory of keeping more invested for longer (kicking the tax can down the road if you can) is sound imho. unless LTA may become an issue and unless of course you want to for example simply move money from your pot to hers to redress any imbalance - assuming she has relevant earnings to enable this (pay 20% tax on withdrawal from yours then get 25% tax relief on deposit in hers). 

We are both retiring at the same time so will be limited to the £3600 (with TR) so no more opportunity to top hers up unfortunately. I think arranging an UFPLS is fairly straightforward with ii but I don't believe you can set up a monthly one.