25% tax free once only on pensions?

Dazed_and_C0nfused

Freddythefearlessfish said:

Thanks everyone.  

A new and vaguely connected question.  If you have two pension pots, can you withdraw more than 25% of the one pot tax free provided the total withdrawn is less than 25% of the total?

Reason for asking this question is:
I have one cash pot and one (fraction of) final salary pot, I have no real idea which will be be worth the most in the end, but lets just do the calculation relatively simply and suppose that the the cash pot has £50,000 in it and the final salary pot will pay a salary of £50,000 per year.

The logical way to take 25% would be to take £12,500 from the cash pot and x from the final salary pot, where the overall result is that thereafter the annual return from the final salary pot is £37,500 per year.

But I was wondering whether potentially instead I might be able to simplify things for me and take the full £50,000 cash pot tax free, and thereafter have only one pension ie pay tax on the £50,000 final salary income per year.

Assuming you mean you have a DC pension and a second DB pension then you can take 25% TFLS from the DC pension and you may be able to take a (tax free) PCLS from the DB pension. 

The PCLS you can take for the DB pension will be set in the scheme rules.

molerat

That is only possible if the pensions are linked, often with AVCs on a DB you can take the whole of the tax free amount from the AVC pot leaving a larger DB pension and his will be outlined in the rules.  But if they are completely separate pensions then the tax free amounts need to be taken separately from each.

Triumph13

Possibly.  But only if the two pots are with the same employer and the employer has set them up as being appropriately linked together.  In that situation it may be an option to leverage the DB section to take more tax free cash from the DC section.  The max you can take is calculated as 25% of 20 x DB income + DC pot value.  So in your example the max taxfree cash would be 25% of (20 x 50 + 50) = £262,500, so you could take the full £50,000 from the DC and the rest from the DB.

dunstonh

Is there any difference to my uncrystalised and crystalised pots after I die?

No.  They all become beneficiary crystallised.

Eg would my wife have to pay more tax to get the crystalised pot?

No.

Once again in warped head considering what happens if at retirement I have no immediate need of a lump sum and considering the implications of taking the 25% tax free sum and immediately reinvesting it in the pension (while I'm still earning) to gain a further 25% benefit.

Post age 75, it will make sense to draw out any TFC (or the immediate lead up to 75 - depending on the size of the fund).  That avoids it becoming taxable on death after 75.   It can be put in an S&S ISA to keep it tax free and pensions and ISA can share the same investments at the same cost.

DRS1

Freddythefearlessfish said:

Oh bother, now I've just thought of another question.  Sorry folks.

Is there any difference to my uncrystalised and crystalised pots after I die?

Eg would my wife have to pay more tax to get the crystalised pot?


Once again in warped head considering what happens if at retirement I have no immediate need of a lump sum and considering the implications of taking the 25% tax free sum and immediately reinvesting it in the pension (while I'm still earning) to gain a further 25% benefit.

One way to think about it is the 25% tax free lump sum dies with you.  So if you have not utilised it while you are alive your beneficiaries cannot use it after you are dead.

Freddythefearlessfish

dunstonh said:

Post age 75, it will make sense to draw out any TFC (or the immediate lead up to 75 - depending on the size of the fund).  That avoids it becoming taxable on death after 75.   It can be put in an S&S ISA to keep it tax free and pensions and ISA can share the same investments at the same cost.

Not quite sure I follow the advantage of moving to an S&S ISA "to keep it tax free".  I thought S&S ISAs become taxable on death anyway?

dunstonh

Freddythefearlessfish said:

dunstonh said:

Post age 75, it will make sense to draw out any TFC (or the immediate lead up to 75 - depending on the size of the fund).  That avoids it becoming taxable on death after 75.   It can be put in an S&S ISA to keep it tax free and pensions and ISA can share the same investments at the same cost.

Not quite sure I follow the advantage of moving to an S&S ISA "to keep it tax free".  I thought S&S ISAs become taxable on death anyway?

No tax between spouses (spouse can use the APS) with the ISA.
However, the 25% TFC is lost if it has not been used.  Spouse would pay income tax at the appropriate rate.
So, putting it into S&S ISA retains tax free status for spouse.

For the next generation, whilst ISA and pension will be included in the state (under the proposals), the pension is also subject to income tax at the beneficiary's appropriate rate.   The ISA is not.