25% tax-free drawdown after buying an annuity.

frank_n_furter77

I would like to purchase an annnuity using £100k from my £400k pension pot and then drawdown a monthly amount from the remaining £300k (until it runs out or I die).

The drawdown would be a "tailored drawdown" from SL (see standard life articles/article-page/what-is-tailored-drawdown

{links edited because I'm not allowed to post them yet}.

Am I correct to assume that 

1) all of the monthly amount received from the annuity is taxable.

2) 25% of the drawdown amount taken each month is free from tax? (assuming I don't exceed the lifetime tax free allowance).

But over50choices.co.uk/blog/pension-rules-tax-considerations says
"If you want to take 25% of your pension pot as a tax-free lump sum you must do this before you buy an annuity."

And MSE savings/discount-pensions/#need-14 doesn't give what I would like to do as an option.

So do I have to take 25% TFLS first and then buy an annuity rather than do what I propose?

(PensionWise guy seemed to think I could do what I propose, but now I'm not so sure.)

Any clarification/correction gratefully received.

zagfles

You could use £100k to buy an annuity and after that draw down as you want from the £300k at 25% tax free and 75% taxable, either using UFPLSs or phased drawdown. But then you'd miss out on tax free cash associated with the annuity.

Alternatively you could take £33,333 tax free cash when you buy the annuity, and leave £266,667 to be used for drawdown. You get more tax free cash that way. 

Another option is you use £75k for the annuity, take £25k tax free and use that to purchase a PLA (an annuity not bought from a pension, so will party tax free). But probably too complicated and may not get good value. 

Marcon

frank_n_furter77 said:

Am I correct to assume that 

1) all of the monthly amount received from the annuity is taxable.

2) 25% of the drawdown amount taken each month is free from tax? (assuming I don't exceed the lifetime tax free allowance).

But over50choices.co.uk/blog/pension-rules-tax-considerations says
"If you want to take 25% of your pension pot as a tax-free lump sum you must do this before you buy an annuity."

1) and 2) - yes, correct.

You can't take tax free cash from an annuity, so IF you were planning to use the whole pot to buy an annuity AND wanted some tax free cash, you would need to take the cash first and then use the remaining funds to buy an annuity. You're not planning to do that - you will be using some of your funds to buy the annuity, so you can take  tax free cash from the remainder (25% of that remainder) at any time, before or after buying the annuity.

frank_n_furter77

@zagfles & @Marcon Thanks for the replies, very reassuring...

The £33,333 tax-free cash strategy (tax-free element of £133,333 leaving £100,000 for purchase) is something I hadn't considered, so pretty sure will do exactly that, thanks again.