ISA or Pension Drawdown

Faith1960

I took early retirement 4 yrs ago age 60.  Husband is already getting his state pension and what with proceeds from moving home we have been topping up our monthly outgoings with £1500 savings and/or my invested ISA.  After speaking to my FA it was agreed that I start drawing from my £300k+ pension and leave my ISA as a future back up when my state pension starts in 2026. First drawdown of £1500 (Sept) went through as expected but today's (Oct) drawdown was £21 less due to tax. The whole conversation with my FA was whether to change the existing arrangement to pension drawdown without paying tax which he said was possible by splitting the amounts from the 'tax free' areas (ie. £1047.50 and £452.50). I have arranged another meeting with the FA but in the meantime have I misunderstood the 'tax free' part of it all? 

dunstonh

After speaking to my FA it was agreed that I start drawing from my £300k+ pension and leave my ISA as a future back up when my state pension starts in 2026. 

That sounds sensible up to your personal allowance.   Have you also done your pension contributions for this year (pension beats ISA for most people - so maximising allowances, even if source of funds is ISA, is often a good idea).

First drawdown of £1500 (Sept) went through as expected but today's (Oct) drawdown was £21 less due to tax.

Staring it mid tax year can usually result in a small undershoot or overshoot where rounding is involved.

£1047.50x 12 equals your personal allowance but it would only be tax free if you have the standard personal allowance (you haven't transferred any to spouse) and you haven't had any other income in this tax year.

I have arranged another meeting with the FA but in the meantime have I misunderstood the 'tax free' part of it all? 

you appear to have understood.     As it stands it is likely another income in this tax year exists or personal allowance is reduced is causing the issue and a tweak will need to be made for this tax year (and adjusted in April for the new tax year is also likely).  Or probably HMRC have looked at it and assumed £1500pm when in reality it was just month one that £1500 and it will correct itself over the remainder of the tax year.

Albermarle

To maximise the amount being drawn, you should be taking £1047.50 taxable income per month( 12 x £1047.50 = £12570 which is exactly your personal allowance)

There are two ways to do this. You can take a UFPLS payment which is 25% tax free and 75% taxable. So you would take £349 a month tax free along with £1047.50 taxable.

Or you can use flexi access drawdown . Still take the £1047.50 taxable but then more tax free to make it up to a figure you require. ( £1500 in your case.) Clearly doing it this way the tax free will run out quicker.

I suspect your first payment was the latter method, but the second payment is a UFPLS. The two payment methods are similar, and possibly someone in the IFA office or at the pension provider has made a simple error. I am just guessing though.  

Audaxer

Faith1960 said:

The whole conversation with my FA was whether to change the existing arrangement to pension drawdown without paying tax which he said was possible by splitting the amounts from the 'tax free' areas (ie. £1047.50 and £452.50). I have arranged another meeting with the FA but in the meantime have I misunderstood the 'tax free' part of it all? 

If you have the full personal allowance of £12,570 available, you can take out a maximum of £16,760 during the tax year without paying tax. Even if you don't plan to spend more than £1,500 per month over the next 6 months or so, it would still make sense to take out the maximum £16,760 this tax year, putting what you don't need into an S&S ISA, invested in similar funds if you wish to keep the money invested.