Optimising tax free pension

ChatPunter

Hi.
I am looking to front load the 25% tax free element of my (so far untouched) defined contribution pensions. The money is contained in two defined contributing pensions. Together they exceed the old lifetime allowance, so I expect to be able to get the maximum today which is £268,275.
I wish to leave my pension money invested as long as possible so intend to draw down in increments every couple of months.

If I were to take the full 25% as a lump sum in one go I could do so. That is not my plan.
So here is my question. Is it possible for me to take incremental amounts from a pension in drawdown and front load the 25%? The idea being that I first withdraw £12,570 (personal allowance) and then take chunks of the tax free maximum amount £268,275. And so only in later years will I pay tax on my pension.

Is this possible?

dunstonh

 Is it possible for me to take incremental amounts from a pension in drawdown and front load the 25%?

yes.  Either phased UFPLS or phased drawdown.

The idea being that I first withdraw £12,570 (personal allowance) and then take chunks of the tax free maximum amount £268,275. And so only in later years will I pay tax on my pension.

It may be worth taking more tax free cash to fund S&S ISA allowances.  Pensions and ISAs can share the same investments at the same cost and if you fund the ISA (and possibly a GIA up to a certain amount) you can increase the tax efficiency further.

Secret2ndAccount

You can pretty much do whatever you want, though you can't do exactly what you stated in your post.
You can take tax free, up to 25% from each pension as and when you wish. You are aware of the overall limit of £268,275.
You can take payments from the taxable parts as and when you wish. They will be treated as income, and you pay tax accordingly for your total annual income. It is likely they will take too much tax from your withdrawal initially. You can contact HMRC to claim the excess back, or wait and they will sort it after the end of the tax year.
For each pension, when you take a taxable payment, you must also take, or have previously taken, the 25% tax free part. If you don't do that, you lose the tax free status of the 25%. So to do what you stated above, you don't start by taking 12,570 taxable. You start with 12570 taxable and 4190 tax free together. If you've already taken a larger tax free amount, you can draw taxable amounts until the 75% taxable catches up with the 25% tax-free, but always keep the total at 25% or more tax free, until you run out of tax free. All of this is per pension, not in total, except for the £268,275 limit.
Some older pensions do not support this level of flexibility, so check with your providers. If these are just regular DC schemes with no special guarantees or benefits, you can transfer them (fairly easily and cheaply/free) to a modern pension which offers fully flexible withdrawal. You might find the transfer easier if you transfer the whole pot before you make any withdrawals.

ali_bear

If you have that much in a retirement fund, you would be advised to talk to an IFA. They know all of the rules, can advise you about minimising tax, where and how to invest cash, can help you get a better deal on an annuity etc. 

Albermarle

ChatPunter said:

Hi.
I am looking to front load the 25% tax free element of my (so far untouched) defined contribution pensions. The money is contained in two defined contributing pensions. Together they exceed the old lifetime allowance, so I expect to be able to get the maximum today which is £268,275.
I wish to leave my pension money invested as long as possible so intend to draw down in increments every couple of months.

If I were to take the full 25% as a lump sum in one go I could do so. That is not my plan.
So here is my question. Is it possible for me to take incremental amounts from a pension in drawdown and front load the 25%? The idea being that I first withdraw £12,570 (personal allowance) and then take chunks of the tax free maximum amount £268,275. And so only in later years will I pay tax on my pension.

Is this possible?

Have a google about crystallisation of DC pensions and you may find your pension providers websites may be quite informative about what they offer as withdrawal options.
Older pensions tend to be less flexible on withdrawal options,  and it can be better to transfer to a new provider before starting withdrawing.

Ciprico

...maybe also consider you may struggle to extract all the taxable pension under basic rate tax, if so then ”new” growth may be better outside the pension, ie dividend and cgt may be less than 40%, (so maybe take all the tax free element out and take the lower tax hit.

(Especially if you have gilts in your Sipp. These can be almost tax free outside pension)