Should I access my personal pension to make use of tax threshold?

SueDebt

I am a basic rate tax payer and I plan to retire later this year.

I won't receive my state pension for another 3 years but I have sufficient money in my ISA plus I receive rental income (£8K guaranteed each year with no voids) that I won't need to touch my personal pension until well after that.

As there will be 3 years when I won't reach the tax threshold, would it make more sense that I withdraw 25% from my personal pension this year when I will pay tax and then £4,570 (£12,570 less £8K) in each of the next 3 years?

QrizB

Using your personal tax allowance makes sense. Taking the full 25% however might not make as much sense, depending on how much we're talking about and what you plan to do with it.

If your personal pension offers UFPLS then taking £5712.50 (£1142.50 tax-free plus £4570 taxable) might be a better idea?

El_Torro

It's a good idea to at least use up your Personal Allowance, yes. 

If you don't need the money you can always add it to an ISA, either Stocks & Shares or Cash. 

Dazed_and_C0nfused

SueDebt said:

I am a basic rate tax payer and I plan to retire later this year.

I won't receive my state pension for another 3 years but I have sufficient money in my ISA plus I receive rental income (£8K guaranteed each year with no voids) that I won't need to touch my personal pension until well after that.

As there will be 3 years when I won't reach the tax threshold, would it make more sense that I withdraw 25% from my personal pension this year when I will pay tax and then £4,570 (£12,570 less £8K) in each of the next 3 years?

If you are married then Marriage Allowance might be worth considering as well if you want to retain more funds in your pension.

You would have a reduced Personal Allowance of £11,310 at the moment for each tax year you apply and are eligible for Marriage Allowance.

dunstonh

Don't think of your pots of money as separate things.   It's all one big collective, and you should draw from it in the most efficient way.    and using the pension to utilise unused personal allowance would be just one of those ways.  Even if you don't need all the money for spending purposes (you can put it into other tax wrappers or even some of it back into the pension or spouse/partner's wrappers etc).

SueDebt

QrizB said:

Using your personal tax allowance makes sense. Taking the full 25% however might not make as much sense, depending on how much we're talking about and what you plan to do with it.

If your personal pension offers UFPLS then taking £5712.50 (£1142.50 tax-free plus £4570 taxable) might be a better idea?

Thanks. I wasn't aware about that so I'll check with my pension company.

SueDebt

I'm not married so marriage allowance doesn't come into it.

Any money I did withdraw in the next 3 years I would put into my ISA as I won't reach the £20K new money allowance during those years.

Roger175

SueDebt said:

QrizB said:

Using your personal tax allowance makes sense. Taking the full 25% however might not make as much sense, depending on how much we're talking about and what you plan to do with it.

If your personal pension offers UFPLS then taking £5712.50 (£1142.50 tax-free plus £4570 taxable) might be a better idea?

Thanks. I wasn't aware about that so I'll check with my pension company.

I agree that UFPLS is the way to go. I am now retired and have 6 years to go before drawing SP, so am taking the maximum I can each year to get out the tax free amount up to the Personal Allowance. I don't need this to live on, having other savings, but it makes sense to get as much out tax-free whilst I can. Once I hit 67, the SP will effectively use up pretty much all my Personal Allowance, so being able to get £12,570 out tax free for the next 6 years is good

Scrounger

SueDebt said:

I'm not married so marriage allowance doesn't come into it.

Any money I did withdraw in the next 3 years I would put into my ISA as I won't reach the £20K new money allowance during those years.

Even better:

You could 'recycle' £2,880* back into pension each year for a £720 (25%) gain, and put the rest into your ISA.

[* more this tax year if you have additional earned income up to your retirement.]


Scrounger

TheTelltaleChart

On the other hand, if you're planning to buy an annuity with any capital, perhaps at a later date, then that capital might be better kept inside a pension wrapper. It is possible to buy an annuity with capital not in a pension (a "purchased life annuity"), but that is a much smaller market, so annuity rates are less favourable, and I'm not sure whether index-linked purchased life annuities are even available.

Could this offset the tax advantages of withdrawing capital from a pension? I'm not sure. Also, it's not relevant if you definitely don't plan to buy an annuity at all, or will in any case be leaving enough capital inside the pension for any annuity purchase.

Albermarle

SueDebt said:

QrizB said:

Using your personal tax allowance makes sense. Taking the full 25% however might not make as much sense, depending on how much we're talking about and what you plan to do with it.

If your personal pension offers UFPLS then taking £5712.50 (£1142.50 tax-free plus £4570 taxable) might be a better idea?

Thanks. I wasn't aware about that so I'll check with my pension company.

Good idea.
Not all providers offer all options, especially if it is an older pension.
If that is an issue, then it is very easy to transfer to a more modern pension.