Pension drawdown while still working

chezzers

Hi!

Looking for some advice re drawing down a small pension pot while still in employment.

Currently earning £23k a year and looking at drawing down a pension pot of £40k in order to pay off debt and revamp home. I understand that the first 25% will be tax free and I will be liable for income tax on the remaining 75%. My question is how the tax will be calculated.?  Will it be treated as a one off payment (like a monthly bonus) or will it be taxed as regular monthly income (i.e HMRC will assume that I have had a £360k wage rise!). The difference as I can see is about £5k in tax and, as much as it could be claimed back, it would be nice to have the money earlier!

I appreciate that drawing down a full pension pot is not advisable, but would appreciate any feedback.

Thanks

TheSpectator

The first taxable withdrawal would be taxed using the emergency code. You would be best doing an initial small withdrawal to enable HMRC to issue the correct tax code then drawdown the remainder.

All assuming you are over 55

molerat

At the end of the year it will be the total taxable amount taken added to your other income that will determine the tax due so it will all work out OK in the end.  How it is taxed at source though depends on the amount and frequency of the withdrawals.  If you take it all in one go the 75% taxable will be taxed at 1257LM1 with the first £1048 tax free, the next £3142 at 20%, a further £7287 at 40% and the remainder at 45% ending up with, including the 25% tax free, £28122 in the bank.  You will be able to reclaim any excess tax deducted. You will also trigger the MPAA limiting your future money purchase pension contributions to £10K pa

Brie

I recently drew down pension over 2 years which meant there were 2 payments made. One in March and one in April (so following tax year as per my pension scheme rules.)  The first payment was for £10k so the scheme had to consider that I was earning at least £120k per year so a silly amount of tax was taken.  I'm not too bothered as 40% on the £7500 bit attracting tax  was not huge (they actually did a portion at the lower tax rate I believe).  And I know it will be paid back once HMRC looks at the low wage I'm on (really well below £40k even with the £10k from the pension).  I expect the second payment will be treated the same but again will be refunded in time.  

BUT for you  - will taking this put you into a higher tax bracket for your normal wages??  I mean £23k taxable wage + £30k taxable from your pension + overtime + bonus + whatever puts your annual income much higher than normal.  Can you drawn down over a couple of years?   

And another thing I can never remember - how does taking drawdown from a pension affect your current pension contributions??  It used to cause a stink but I think that might have changed.

GrumpyDil

Brie said:

And another thing I can never remember - how does taking drawdown from a pension affect your current pension contributions??  It used to cause a stink but I think that might have changed.

Once you have drawn 1p of taxable income from a defined contribution pension you then trigger the MPAA which limits future pension contributions to no more than 10000 per annum.

Albermarle

GrumpyDil said:

Brie said:

And another thing I can never remember - how does taking drawdown from a pension affect your current pension contributions??  It used to cause a stink but I think that might have changed.

Once you have drawn 1p of taxable income from a defined contribution pension you then trigger the MPAA which limits future pension contributions to no more than 10000 per annum.

And that limit includes tax relief and employer contributions .

Sam_666

Very bad idea, pensions are there to fund your life in retirement, not meant for random spending on house projects or pay off debts. But, its not my money anyways.