Withdrawing tax free amount from pension pot.

TELLIT01

My wife retired recently and has a small pension pot of under £30k.  The pension income that would generate is low so she has decided to leave the pot sitting and is considering withdrawing the full tax free amount.  If she does this will it simply be a case that all future withdrawals will be taxed at the current base rate or are there any other potential pitfalls we need to be aware of?  Other pension income does mean she is already paying tax.

Marcon

TELLIT01 said:

My wife retired recently and has a small pension pot of under £30k.  The pension income that would generate is low so she has decided to leave the pot sitting and is considering withdrawing the full tax free amount.  If she does this will it simply be a case that all future withdrawals will be taxed at the current base rate or are there any other potential pitfalls we need to be aware of?  Other pension income does mean she is already paying tax.

If she withdraws the full 25% tax free cash now, then all future withdrawals from the pot will be taxed at her marginal rate (so could be higher than base rate, depending on other taxable income in the tax year in which she makes the withdrawal).

TELLIT01

Thanks for that.  She certainly won't be hitting anything higher than the base rate tax.  I suppose the one risk would be if she decided to withdraw the entire remaining 75% in one go that may potentially push her into a higher rate.  There are no plans to do that though.

Albermarle

The normal advice is not to take the 25% tax free, just because it is there. She can take it later ( up to age 75 with current rules).
However if she has a use for it now, then it makes more sense to take it.

dharm999

we are are buying a house, hopefully our forever home, so OH is taking the full 25% tax free lump sum, to put towards it.  No plans to touch the remaining 75%, as no need to, given other income sources.  We have a specific use for it, so are taking it

TELLIT01

Albermarle said:

The normal advice is not to take the 25% tax free, just because it is there. She can take it later ( up to age 75 with current rules).
However if she has a use for it now, then it makes more sense to take it.

There is a potential use for it.  There is a niggling concern that the new Government may make changes to pension rules to fatten their coffers.  One obvious option would be to do away with the tax free element.

MallyGirl

TELLIT01 said:

Albermarle said:

The normal advice is not to take the 25% tax free, just because it is there. She can take it later ( up to age 75 with current rules).
However if she has a use for it now, then it makes more sense to take it.

There is a potential use for it.  There is a niggling concern that the new Government may make changes to pension rules to fatten their coffers.  One obvious option would be to do away with the tax free element.

Take it if you have a use for it - not because of rumours and guesses about future treasury decisions 

dunstonh

TELLIT01 said:

Albermarle said:

The normal advice is not to take the 25% tax free, just because it is there. She can take it later ( up to age 75 with current rules).
However if she has a use for it now, then it makes more sense to take it.

There is a potential use for it.  There is a niggling concern that the new Government may make changes to pension rules to fatten their coffers.  One obvious option would be to do away with the tax free element.

Why is that obvious?

a) it is one of the smaller costs to the treasury
b) it is used by many people to repay mortgages and debts. 
c) KS is already on record as saying it isn't going

Qyburn

Albermarle said:

The normal advice is not to take the 25% tax free, just because it is there. She can take it later ( up to age 75 with current rules).

What happens age 75 or later, is everything taxable? That would be a big incentive to pull out any remaining tax free beforehand.

LHW99

I thought the rule about losing the tax-free cash after 75 had been changed, but I could be wrong (often am)

Albermarle

Qyburn said:

Albermarle said:

The normal advice is not to take the 25% tax free, just because it is there. She can take it later ( up to age 75 with current rules).

What happens age 75 or later, is everything taxable? That would be a big incentive to pull out any remaining tax free beforehand.

I think so, but issues around this age 75 rule/ treatment of pensions on death ( before and after 75) is a likely area for review at some point.