25% tax free once only on pensions?

Freddythefearlessfish

Sorry to be stupid but I don't really understand the 25% tax free allowance, I'm sure this has been asked before, but I've failed to find a simple answer to my question.  So figured I would pose it here.

Let's suppose that on my 55th birthday I have £200,000 saved in a pension pot.  I clearly can't retire on that amount so will need to keep working and contributing to my pension pot.  Let's suppose that I am able to save a further £200,000 in my pension between age 55 and 68 when I intend to retire.

On my 55th birthday I am eligible to withdraw a tax free lump sum (of up to £50,000 ie 25% of the £200,000 already in the account).

If I don't withdraw anything on my 55th birthday and wait until my 68th birthday I am eligible to withdraw a tax free lump sum (of up to £100,000, ie 25% of the £400,000 the original £200,000 + the extra £200,000).

So my question relates to what happens if I do withdraw something at age 55?    

Eg lets suppose I withdraw all £50,000 at age 55.  Am I eligible to withdraw another £50,000 at age 68?  What if I only wanted a new car at age 55 and so only withdrew £15,000 at age 55?  Have I completely scuppered myself by doing so?

molerat

If you withdraw a tax free amount only then 3 times that amount will move into a crystallised pot leaving the remainder uncrystallised allowing a further 25% to be taken from that amount.  Any further contributions add to the uncrystallised amount.

So if you have a £200k pot and withdraw £15K tax free £45K will move into the crystallised pot which can be taken later all, including any growth, taxed and £140K stays uncrystallised and can have a further 25%, including any growth and further contributions, taken tax free.  Adding another £200K means that there is £85K available tax free.

Albermarle

As above, once you understand the concept of uncrystallised and crystallised pensions, then it should all become clearer. 

tichtich

Another way to look at it...

You are entitled to tax free withdrawals totalling 25% of whatever money accrues in your pot (whether it accrues from contributions or investment returns). That 25% tax free entitlement can be split into as many separate withdrawals as you like. So no, making a small withdrawal does not scupper you in any way.

LHW99

tichtich said:

Another way to look at it...

You are entitled to tax free withdrawals totalling 25% of whatever money accrues in your pot (whether it accrues from contributions or investment returns). That 25% tax free entitlement can be split into as many separate withdrawals as you like. So no, making a small withdrawal does not scupper you in any way.

But only from the uncrystallised part.

If (as in the eg above) for example:

So if you have a £200k pot and withdraw £15K tax free £45K will move into the crystallised pot

there is no further 25% of that £45k, no matter how much additional growth it accumulates.

carrspaints

I have a query that is in some ways similar to the original post.

If I retired today and have a pension pot of £400k, I can take 25% (£100k) tax free. If I have no other income for the following years and I draw down the tax free allowance of £12,570 at the start of each tax year, will that be taxable because I took the 25% today? Or will that be tax free? Thanks

theblueflash

It is taxable income, however, if you have no other income and therefore entitled to the usual tax allowances - this would utilise that allowance, meaning you would pay £0 tax on that amount. 

MallyGirl

It is important to get our head around the difference between tax free (the 25%) and taxable but no tax due (up to £12570 total income in the year).

jimjames

tichtich said:

So no, making a small withdrawal does not scupper you in any way.

The way it could scupper you is that the remainder of that sum (the other 75%) is now taxable so if you take the 25% early and leave the rest to grow then you are increasing the amount of taxable money in your pension.

shortseller09

Bear in mind that there is an uppper limit of £268,275 that can be taken tax-free.

chichelle32

I am no longer working and am aiming to clear my mortgage. is it possible to withdraw 25% of my pension tax-free AND the £12,570 tax-free allowance in one hit?