Drawdown query

System

This discussion was created from comments split from: 25% Tax Free Lump Sum Pre Budget.

Prendlin

I want draw down from my pension aprox £15,000 but my financial advisor suggests I don't take this from the tax free lump sum because of how this money has been invested. I have asked for clarity why I would not take this £15k from my tax free lump to avoid the 20% tax. Just wondered what anyone else thoughts are on this

dunstonh

I want draw down from my pension aprox £15,000 but my financial advisor suggests I don't take this from the tax free lump sum because of how this money has been invested. I have asked for clarity why I would not take this £15k from my tax free lump to avoid the 20% tax. Just wondered what anyone else thoughts are on this

Can't answer with the limited information.   Do you use up your personal allowance?   Do you have other tax wrappers?    Are you already drawing on the pension (perhaps using monthly UFPLS?)

Albermarle

Prendlin said:

I want draw down from my pension aprox £15,000 but my financial advisor suggests I don't take this from the tax free lump sum because of how this money has been invested. I have asked for clarity why I would not take this £15k from my tax free lump to avoid the 20% tax. Just wondered what anyone else thoughts are on this

You should start your own thread, and at the same time provide some more contextual info.

MallyGirl

Albermarle said:

Prendlin said:

I want draw down from my pension aprox £15,000 but my financial advisor suggests I don't take this from the tax free lump sum because of how this money has been invested. I have asked for clarity why I would not take this £15k from my tax free lump to avoid the 20% tax. Just wondered what anyone else thoughts are on this

You should start your own thread, and at the same time provide some more contextual info.

I have split this out into its own thread

Sarahspangles

Prendlin said:

I want draw down from my pension aprox £15,000 but my financial advisor suggests I don't take this from the tax free lump sum because of how this money has been invested. I have asked for clarity why I would not take this £15k from my tax free lump to avoid the 20% tax. Just wondered what anyone else thoughts are on this

It’s hard to know what you’re asking without more detail. One possibility is that your advisor is trying to prevent you saving tax now, only to pay more tax later.

If you take £15,000 tax free that is 25% of £60,000. The difference, the £45,000 that you leave in your pension, is crystallised. This means all of it’s taxable when you draw it. If in the meantime it has grown through investment gains to £60,000 again, then all of that will be taxed, not just £45,000.

gm0

In my experience advisers are impatient about this particular topic and can be dismissive.  Wishing to move on quickly with the conversation. 

From their perspective it is clear and settled (and a boring FAQ) - if you don't take tax free cash until it is actually needed - right now.  Then the pot can grow.  And so there is *more tax free cash (to LSA limit) which can be taken when it *is* needed and accessed later. So it is "wrong" to take it early and small and just repackage it as savings - unless it is needed for a *defined* capital consumption or gifting purpose.  See also IHT exemption for DC pension pots (which for the moment at least applies to the money inside the pension.  But not to the money outside.  If affected (say by owning a house in the south) then 40% vs 0% on that money if you die before spending it.   ISA would be raked.  Pension would not.  So again.  Don't worry about the tax free cash.  Leave it inside is the "current rules" advice until the pension is needed (via whatever access method).

Of course - you could take it out.  And consume for income via early retirement.  Or reinvest in ISA.  Meet a capital need - an early retirement motorhome for your travel plans.  Whatever your life goals are.  And resources allow.  Gift it to children starting the 7 year gifting PET clock to remove it from your IHT.  And they wrap it in an ISA so no CGT or income tax on growth.  They have savings so means tested benefits entitlements will be affected.  And they have some of their housing deposit.  A consumer with sufficient retirement resources overall might decide to help their kids with a housing deposit that way.  And transmit wealth generationally - on the current rules.  Doing so before someone comes along to change those rules to prevent exactly that. (e.g. Lifetime gifting limits in a broader IHT reform and such like).   And also while the risk of premature death interrupting the plan is lower (younger).


Now an adviser can only really work with the rules as they are.  And when the rules change - so does the advice with the explanation why - Was A. Now B because XYZ obvious.  Wasn't wrong to tell you A.  Now it's B.  And you missed the moment for A. Sorry.

A consumer may choose to speculate on what may happen.  And right or wrong.  Can position against regulation change.  The papers whip up a froth of possible horrors every budget.  Generally this is a fools errand.  So it is about your goals. Your resource - you and your family.

People do decide that some savings belong in a S&S ISA (to be away from further pension rules fiddling).  And if  overall plan supports a sensible approach around IHT.  That decision can be right 

Lord Adair Turner (of pensions commission fame 20 years ago) was in a Resolution Foundation pensions video only yesterday about how autoenrolment has worked out - and in a sidebar pensions and savings Q&A conversation was saying that it was rational and indeed recommendable for a consumer to save in more than one tax wrapper - pension,  isa etc.  partly to hedge the risk of government fiddling with the tax code in particular spots.
And also for reasons around access rules (precautionary rainy day savings) where pensions are more constrained on access.  If your savings are unbalanced.  A reshuffle may again be a sensible choice despite the known pitfalls - above.  Tradeoffs exist as described above.

The real villain here is the tax code being so complex you need to understand a chunk of this to make sensible decisions.