Minimal tax when withdrawing from pension

Qyburn

Justso65 said:

Thank you for all the comments.  As usual great advice and much to ponder for me.  Some things I just hadn’t considered.  Like the tax on interest if I pull too much as a tax free lump sum.

One of issues you face is that while you still have tax free money in the pension, you don't have complete freedom to take taxable money.  If there's a way to wangle it then the best course of action might be to take £12,570 taxable plus £27,430 for each of the first five years. That uses five rather than four years personal allowance, thus saving £2,514 in future tax. And still leaves some tx free.

ader42

Be careful you haven’t missed the most important point that Triumph13 pointed out.

The question is what will your income be after the 5 years?
The state pension if as now at £12k + a final salary pension - how much is that?
If it’s £38k then you will be a higher rate tax payer on all taxable income from the DC pot.

So as Triumph13 says make sure you use not just your Personal Allowance but also your 20% tax band before those other sources of income come into play - and maximise the tax free cash that you will have left after the 5 years.

It’s likely better to pay 20% tax now than 40% tax later.

Sarahspangles

ader42 said:

Be careful you haven’t missed the most important point that Triumph13 pointed out.

The question is what will your income be after the 5 years?
The state pension if as now at £12k + a final salary pension - how much is that?
If it’s £38k then you will be a higher rate tax payer on all taxable income from the DC pot.

So as Triumph13 says make sure you use not just your Personal Allowance but also your 20% tax band before those other sources of income come into play - and maximise the tax free cash that you will have left after the 5 years.

It’s likely better to pay 20% tax now than 40% tax later.

I don’t think this is mentioned enough.  Another consideration is spouse’s pension. When either of us dies, the survivor will become a higher rate tax payer. We’ve mitigated this to some extent by one of us taking the maximum lump sum, on a decent commutation rate.

We’ll pay less tax overall than those couples where one spouse has the majority of pension provision so that they’re paying higher rate tax throughout retirement, with no way to use the other’s personal allowance.

jim8888

"It’s likely better to pay 20% tax now than 40% tax later."

Yup, I agree with this. I wish I'd taken the max I could up to the 40% band in the first two years of my pension and taking the 20% hit instead of a 40% one. I'd just have put the money into a cash account, or maybe into equities/ISA's, because I don't really need it, but having a cash buffer against unforeseen future spending is always nice security. Also, as mentioned here, it looks for many of us that our tax free allowance of £12,570 is pretty much going to be taken by the state pension and everything and anything above that is going to be subject to 20% or 40% tax.  

Albermarle

jim8888 said:

"It’s likely better to pay 20% tax now than 40% tax later."

Yup, I agree with this. I wish I'd taken the max I could up to the 40% band in the first two years of my pension and taking the 20% hit instead of a 40% one. I'd just have put the money into a cash account, or maybe into equities/ISA's, because I don't really need it, but having a cash buffer against unforeseen future spending is always nice security. Also, as mentioned here, it looks for many of us that our tax free allowance of £12,570 is pretty much going to be taken by the state pension and everything and anything above that is going to be subject to 20% or 40% tax.  

Although if planning to leave a legacy and you are in IHT territory, then better to leave it in the pension.
Although by this afternoon that strategy might have to be revised....

BikingBud

ader42 said:

Be careful you haven’t missed the most important point that Triumph13 pointed out.

The question is what will your income be after the 5 years?
The state pension if as now at £12k + a final salary pension - how much is that?
If it’s £38k then you will be a higher rate tax payer on all taxable income from the DC pot.

So as Triumph13 says make sure you use not just your Personal Allowance but also your 20% tax band before those other sources of income come into play - and maximise the tax free cash that you will have left after the 5 years.

It’s likely better to pay 20% tax now than 40% tax later.

Currently trying to finesse this but realising higher rate will hit me somewhere along the line. Some headroom in tax banding downstream might help, they can't remain where they are forever! 

I need to understand a little more about TFLS options or just decide to leave it all for the kids 🤷🏼‍♂️

BikingBud

To assure my current understanding so as not to breach 40% liability:

DC Pot ~ £100k 
Take lump sums over 5 years = 5*£20k (ignoring any growth)
Each lump has 25% allowance  = £5k Tax Free + £15K - 20% tax = £17k payable per year

Providing the additional £17K incomes leaves my total income below £50270

af1963

BikingBud said:

To assure my current understanding so as not to breach 40% liability:

DC Pot ~ £100k 
Take lump sums over 5 years = 5*£20k (ignoring any growth)
Each lump has 25% allowance  = £5k Tax Free + £15K - 20% tax = £17k payable per year

Providing the additional £17K incomes leaves my total income below £50270

The taxable income being taken from the DC is £15k so that's what needs to be added to your other sources of taxable income, so that the total comes to less than the 40% threshold.