Crystallising my pension - tax implication

frankiesowner

I have a money purchase pension scheme from years ago with a company I worked for - value is low £10,000s. I was always told to keep it for a rainy day and if not used could be left to dependents. In these taxing times that's no longer an option. I understand the 25% tax free bit and that the rest might be left in a holding account to be available for drawdown, I've read up a lot but some of the explanations are confusing. Are the following statements correct?

- After the 25% tax free lump sum the rest is held in a fund (my choice?) and avail for drawdown
- Anything I take from this fund is taxed as additional income - ie income tax

Question: The money left in the fund, is any gain on that following the crystallising subject to CGT as well as income tax once drawn down?

Thanks.

NoMore

No if its still in the pension, all gains are still tax free. Only tax is income tax on withdrawal. 

Dazed_and_C0nfused

frankiesowner said:

I have a money purchase pension scheme from years ago with a company I worked for - value is low £10,000s. I was always told to keep it for a rainy day and if not used could be left to dependents. In these taxing times that's no longer an option. I understand the 25% tax free bit and that the rest might be left in a holding account to be available for drawdown, I've read up a lot but some of the explanations are confusing. Are the following statements correct?

- After the 25% tax free lump sum the rest is held in a fund (my choice?) and avail for drawdown
- Anything I take from this fund is taxed as additional income - ie income tax

Question: The money left in the fund, is any gain on that following the crystallising subject to CGT as well as income tax once drawn down?

Thanks.

No and no.

You could, and a lot of people would, have it in a fund but you could leave it as cash (within the pension).

It is taxable income but any tax due will depend on your other taxable income in the tax year you take money out.

There is no CGT on gains within the pension.

frankiesowner

Thanks for the replies so far. Just to clarify, once I crystallise the pension and take the 25% the rest is still considered to be 'in the pension' until I draw it down?

Baldytyke88

Each pension scheme will have its own rules and options, you need to give more details.

At what age can you draw the pension, does the scheme you are in allow drawdown, can you choose which funds it's invested in.

Linton

frankiesowner said:

Thanks for the replies so far. Just to clarify, once I crystallise the pension and take the 25% the rest is still considered to be 'in the pension' until I draw it down?

Yes, in general.  But if your pension was from many years ago it may not support leaving the 75% in the pension when you take the 25%.  You will need to check with the provider.

frankiesowner

Linton said:

frankiesowner said:

Thanks for the replies so far. Just to clarify, once I crystallise the pension and take the 25% the rest is still considered to be 'in the pension' until I draw it down?

Yes, in general.  But if your pension was from many years ago it may not support leaving the 75% in the pension when you take the 25%.  You will need to check with the provider.

Ah - so if if the 75% was considered 'outside the pension' then what are the tax implications (kind of back to my original question)? Although I accept I will need to find out how the 75% is treated from my provider!

Dazed_and_C0nfused

frankiesowner said:

Linton said:

frankiesowner said:

Thanks for the replies so far. Just to clarify, once I crystallise the pension and take the 25% the rest is still considered to be 'in the pension' until I draw it down?

Yes, in general.  But if your pension was from many years ago it may not support leaving the 75% in the pension when you take the 25%.  You will need to check with the provider.

Ah - so if if the 75% was considered 'outside the pension' then what are the tax implications (kind of back to my original question)? Although I accept I will need to find out how the 75% is treated from my provider!

If you choose to take it out of the pension then it is taxable pension income, essentially the same as having extra (taxable) earnings.

A withdrawal could push you into a higher tax bracket.

Or you might not owe any tax on it. 

It all depends on your overall income situation in the tax year you take a taxable element out.

artyboy

OP, I'm not sure if you are still working/contributing to a pension, but bear in mind that as soon as you take out even a penny of that other 75% that is taxable, then the MPAA kicks in, and limits any future pension contributions to a maximum of £10k per year.

Also, if this is an old pension scheme, you might find that drawdown is not an option and you would be required to purchase an annuity with the 75%, immediately after taking the 25% tax free cash. If so, you may need to transfer this to a more modern pension scheme to achieve what you're looking for.

Albermarle

frankiesowner said:

Linton said:

frankiesowner said:

Thanks for the replies so far. Just to clarify, once I crystallise the pension and take the 25% the rest is still considered to be 'in the pension' until I draw it down?

Yes, in general.  But if your pension was from many years ago it may not support leaving the 75% in the pension when you take the 25%.  You will need to check with the provider.

Ah - so if if the 75% was considered 'outside the pension' then what are the tax implications (kind of back to my original question)? Although I accept I will need to find out how the 75% is treated from my provider!

Not quite what was meant.
If you had a modern pension, you could withdraw from the 75% at will. So once a year, once a month, or not at all etc
With an old pension you might only get two options
Withdraw it all in one go, which could land you with a big tax bill,  or buy an annuity with it.

Or it might have more options, but not the same wide flexibility as a modern one.

Luckily nowadays it is very easy to open a new pension and transfer an old pension into it, if necessary.

Linton

frankiesowner said:

Linton said:

frankiesowner said:

Thanks for the replies so far. Just to clarify, once I crystallise the pension and take the 25% the rest is still considered to be 'in the pension' until I draw it down?

Yes, in general.  But if your pension was from many years ago it may not support leaving the 75% in the pension when you take the 25%.  You will need to check with the provider.

Ah - so if if the 75% was considered 'outside the pension' then what are the tax implications (kind of back to my original question)? Although I accept I will need to find out how the 75% is treated from my provider!

The 75% remains inside the pension but has a "crystallised" status meaning that anything you withdraw from it is taxable.