retiring early taking pension drawdown

clairbear_3

Hi Im retiring early and considering taking the £12500 each year from my private pension  how do I avoid the taxman taking  20% tax and having to reclaim it? is it better to take it monthly or a one off payment? 

Albermarle

clairbear_3 said:

Hi Im retiring early and considering taking the £12500 each year from my private pension  how do I avoid the taxman taking  20% tax and having to reclaim it? is it better to take it monthly or a one off payment? 

Easiest way is just to take a regular monthly payment. 

Presume you know that you can not just take taxable income from a pension without taking some tax free cash at the same time/earlier?

clairbear_3

yes thanks Ive already taken the 25% tax free so when I request £1000/month drawdown will the provider take 20% tax off  

Dazed_and_C0nfused

clairbear_3 said:

yes thanks Ive already taken the 25% tax free so when I request £1000/month drawdown will the provider take 20% tax off  

The first taxable payment will have the emergency tax code used so zero tax on £1,000

dunstonh

clairbear_3 said:

Hi Im retiring early and considering taking the £12500 each year from my private pension  how do I avoid the taxman taking  20% tax and having to reclaim it? is it better to take it monthly or a one off payment? 

As mentioned, monthly will be the simple way for a complete year where the whole personal allowance is available.   You may need to make an adjustment in year one to reflect other income payable from before you retire unless you manage to have your final payroll from the employer in March and your first payroll from the pension company in April.

clairbear_3

thanks I read some horror stories where someone took £12k in one month and the taxman 'assumed' they were taking that every month and taxed accordingly!

clairbear_3

one other thing.. If i am taking (£12k)from one pension can I pay  into my other(smaller) pension pot each year? 

Marcon

clairbear_3 said:

one other thing.. If i am taking (£12k)from one pension can I pay  into my other(smaller) pension pot each year? 

Unless you have earned income in the tax year, in terms of tax-relievable contributions you are limited to contributing £2,880 a year, which the provider 'tops up' with basic rate tax relief. 

Marcon

clairbear_3 said:

thanks I read some horror stories where someone took £12k in one month and the taxman 'assumed' they were taking that every month and taxed accordingly!

Yes, that's how the PAYE system works!

Linton

clairbear_3 said:

thanks I read some horror stories where someone took £12k in one month and the taxman 'assumed' they were taking that every month and taxed accordingly!

The tax man makes no assumptions.  What happens under PAYE  is that each month 1/12 of your tax bands and allowances become available and are accumulated. If you take a large pension withdrawal at the start of the year you will have accumulated insufficient allowances to avoid paying a higher rate of tax.

The same thing can happen with one-off bonuses if you are employed.

PAYE works the way it does to monimise the chances of weekly/monthly paid employees being lumbered with an unepected tax bill at the end of the tax year which then has to be chased bty HMRC.  It does this job very well.  Not so good for drawdown pensioners but the costs of developing a new separate tax system could not possibly be justified.

Hoenir

clairbear_3 said:

thanks I read some horror stories where someone took £12k in one month and the taxman 'assumed' they were taking that every month and taxed accordingly!

That's just how payroll systems has always worked i.e, when you were employed for decades. Misinformation unfortunately spreads like a wildfire on social media.