Pension Drawdown

Scruffy_Meee

I am trying to work out how Pension drawdown works.

If I have a pension pot of 200K I believe I can as a one off, take out 25% so 50K tax free.

If I don’t take the lump sum but instead draw 10K a year on top of my state pension do I get the 25% tax free off the 10K yearly, so I only pay 20% tax on £7500.

 

Next question, say I take the 25% out which leaves £150K I then over the next few years add back in 50K. How then do the tax implications work then for the above.

TIA

LHW99

Scruffy_Meee said:

I am trying to work out how Pension drawdown works.

If I have a pension pot of 200K I believe I can as a one off, take out 25% so 50K tax free

Yes

If I don’t take the lump sum but instead draw 10K a year on top of my state pension do I get the 25% tax free off the 10K yearly, so I only pay 20% tax on £7500.

 Yes, That would be UFPLS. However, the tax man could take more as you'd be put on an emergency coding (ie they assume you take that amount each month). That can be reclaimed / get sorted at the end of the financial year. Some older policies don't allow UFPLS, so you may have to transfer.

Next question, say I take the 25% out which leaves £150K I then over the next few years add back in 50K. How then do the tax implications work then for the above.

Depends how the pension people organise their platform. Some would keep the crystallised £150k separate from the new money, some would merely assign a percentage of the pot.

TIA

That's my take on it, but more knowledgable people will surely correct / add to it as necessary

NickPoole

My limited understanding is that if you move your pension into drawdown you can take the 25% tax free Cash and as long as you take no taxable income from the drawdown account you can continue to accrue more pension (in whatever your original pension vehicle was) within the annual allowance limits .

Linton

a)  You cannot take a taxable sum without taking or having taken the corresponding 25% tax free.

b) How you do this is very flexible.  You can take it all in one go or you can take regular payments consisting of 25% tax free and 75% taxable or something in between.  You should check whether your pension scheme provides this flexibility.
 
c)  If you only take some, but not all the tax free amount your pot is effectively split into 2 parts.  The first part where the tax free 25% has alreadt been taken is "crystallised".  The second part consisting of the money for which the tax free has not been taken is "uncrystalised"*.  Any new money goes into the uncrystalised part.

To take a simple example.:
1) You start with £200K with a possible £50K of tax free money available.
2) You take £20K tax free.  This leaves you with 3X£20K= £60K crystalised and £120K uncrystalised still in your pension.
3) You pay in £50K**.  So you now have the previous £60K crystalised and £120K+£50K =£170K uncrystalised.
4) So you could take 25%of £170K tax free.

*Different pensions implement this in different ways.  Your pot could be physically split giving you possibly different investments in the crystalised and uncrystalised portions.  Alternatively the pension scheme could smply maintain a % crystalised figure that is adjusted when money is withdrawn or paid in.

** you can only pay in £50K if this was covered by earned income (ie from employment) received in the same tax year.

squirrelpie

And if/when you take even 1p of taxable money from your pension, you forever limit how much you can pay into your pension each year to £10k (google MPAA for detail)

El_Torro

It's worth bearing in mind that some pensions (especially old pensions) don't give you all the options that the law allows. This will probably be because when the pension was set up all the options that exist today didn't exist then. There is no legal requirement for pension providers to update their systems to allow all the options. 

If you find yourself in this situation the best way to get around it is to move your pension to a provider that allows you to do what you want. 

Scruffy_Meee

squirrelpie said:

And if/when you take even 1p of taxable money from your pension, you forever limit how much you can pay into your pension each year to £10k (google MPAA for detail)

So after I take any money out the max I can pay back in each year is 10K? It that 10K overall or me paying in 10K. So for example if I am in a private pension and I pay in 6K a year can my employer only pay in 4K?

Scruffy_Meee

Linton said:

a)  You cannot take a taxable sum without taking or having taken the corresponding 25% tax free.

b) How you do this is very flexible.  You can take it all in one go or you can take regular payments consisting of 25% tax free and 75% taxable or something in between.  You should check whether your pension scheme provides this flexibility.
 
c)  If you only take some, but not all the tax free amount your pot is effectively split into 2 parts.  The first part where the tax free 25% has alreadt been taken is "crystallised".  The second part consisting of the money for which the tax free has not been taken is "uncrystalised"*.  Any new money goes into the uncrystalised part.

To take a simple example.:
1) You start with £200K with a possible £50K of tax free money available.
2) You take £20K tax free.  This leaves you with 3X£20K= £60K crystalised and £120K uncrystalised still in your pension.
3) You pay in £50K**.  So you now have the previous £60K crystalised and £120K+£50K =£170K uncrystalised.
4) So you could take 25%of £170K tax free.

*Different pensions implement this in different ways.  Your pot could be physically split giving you possibly different investments in the crystalised and uncrystalised portions.  Alternatively the pension scheme could smply maintain a % crystalised figure that is adjusted when money is withdrawn or paid in.

** you can only pay in £50K if this was covered by earned income (ie from employment) received in the same tax year.

Sorry just trying to get my head around your example, Can you explain this further - 
You take £20K tax free.  This leaves you with 3X£20K= £60K crystalised and £120K uncrystalised still in your pension.
If I took 20K tax free would I not be left with a possible 30K take free I could take?

The pension i have is a current private pension which I am still paying into.

Linton

Scruffy_Meee said:

Linton said:

a)  You cannot take a taxable sum without taking or having taken the corresponding 25% tax free.

b) How you do this is very flexible.  You can take it all in one go or you can take regular payments consisting of 25% tax free and 75% taxable or something in between.  You should check whether your pension scheme provides this flexibility.
 
c)  If you only take some, but not all the tax free amount your pot is effectively split into 2 parts.  The first part where the tax free 25% has alreadt been taken is "crystallised".  The second part consisting of the money for which the tax free has not been taken is "uncrystalised"*.  Any new money goes into the uncrystalised part.

To take a simple example.:
1) You start with £200K with a possible £50K of tax free money available.
2) You take £20K tax free.  This leaves you with 3X£20K= £60K crystalised and £120K uncrystalised still in your pension.
3) You pay in £50K**.  So you now have the previous £60K crystalised and £120K+£50K =£170K uncrystalised.
4) So you could take 25%of £170K tax free.

*Different pensions implement this in different ways.  Your pot could be physically split giving you possibly different investments in the crystalised and uncrystalised portions.  Alternatively the pension scheme could smply maintain a % crystalised figure that is adjusted when money is withdrawn or paid in.

** you can only pay in £50K if this was covered by earned income (ie from employment) received in the same tax year.

Sorry just trying to get my head around your example, Can you explain this further - 
You take £20K tax free.  This leaves you with 3X£20K= £60K crystalised and £120K uncrystalised still in your pension.
If I took 20K tax free would I not be left with a possible 30K take free I could take?

The pension i have is a current private pension which I am still paying into.

25% of the uncrystalised pot can be taked tax free. 25% of £120k is £30K

Albermarle

Scruffy_Meee said:

Linton said:

a)  You cannot take a taxable sum without taking or having taken the corresponding 25% tax free.

b) How you do this is very flexible.  You can take it all in one go or you can take regular payments consisting of 25% tax free and 75% taxable or something in between.  You should check whether your pension scheme provides this flexibility.
 
c)  If you only take some, but not all the tax free amount your pot is effectively split into 2 parts.  The first part where the tax free 25% has alreadt been taken is "crystallised".  The second part consisting of the money for which the tax free has not been taken is "uncrystalised"*.  Any new money goes into the uncrystalised part.

To take a simple example.:
1) You start with £200K with a possible £50K of tax free money available.
2) You take £20K tax free.  This leaves you with 3X£20K= £60K crystalised and £120K uncrystalised still in your pension.
3) You pay in £50K**.  So you now have the previous £60K crystalised and £120K+£50K =£170K uncrystalised.
4) So you could take 25%of £170K tax free.

*Different pensions implement this in different ways.  Your pot could be physically split giving you possibly different investments in the crystalised and uncrystalised portions.  Alternatively the pension scheme could smply maintain a % crystalised figure that is adjusted when money is withdrawn or paid in.

** you can only pay in £50K if this was covered by earned income (ie from employment) received in the same tax year.

Sorry just trying to get my head around your example, Can you explain this further - 
You take £20K tax free.  This leaves you with 3X£20K= £60K crystalised and £120K uncrystalised still in your pension.
If I took 20K tax free would I not be left with a possible 30K take free I could take?

The pension i have is a current private pension which I am still paying into.

After you took the £20K tax free, you would be left with .

£60 K crystallised ( this means no more tax free from this part, anything you take from this part is taxable income)

And £120K still uncrystallised, so 25% can still be taken tax free from this and the rest would be crystallised. If in the meantime the pension grew or shrunk, you would actually get 25% of that ( so could be more or less than 25% of £120K )

Albermarle

Scruffy_Meee said:

squirrelpie said:

And if/when you take even 1p of taxable money from your pension, you forever limit how much you can pay into your pension each year to £10k (google MPAA for detail)

So after I take any money out the max I can pay back in each year is 10K? It that 10K overall or me paying in 10K. So for example if I am in a private pension and I pay in 6K a year can my employer only pay in 4K?

If you only take tax free cash then the MPAA of £10K does not apply.
It will apply as soon as you take one penny of taxable income from the pension.
The £10K includes your contribution, tax relief and employer contribution.

Normally it is best to avoid taking taxable income from your pension, whilst you are still working /contributing.