Crystallising my pension - tax implication

xylophone

You might wish to arrange an appointment with Pension Wise.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise

If £10,000 or under, check small pot if you wish to access income without triggering MPAA.

https://forums.moneysavingexpert.com/discussion/6623781/nest-triggered-mpaa-on-a-pot-less-than-10-000#latest

DRS1

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.

Why not?

Do you suddenly need some money?

Or are you thinking of the proposed IHT changes?

The IHT changes  may not affect you in real life.

Aretnap

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!

It's not "considered" to be outside the pension - you either withdraw it from the pension or you don't.

With most modern pensions you have the option of flexible drawdown. For every £100 of tax free cash you withdraw, £300 moves to a "crystallized" pot within your pension. Money in the crystalized pot is still in your pension, can still be invested, and can still grow without capital gains tax - it's just that every penny you withdraw from the crystallized pot will be taxable income. 

The complication arises because in days of yore this sort of flexible drawdown was not an option, so many older pensions are not set up to offer it in terms of administration or IT. So your pension provider might insist that if you withdraw tax free cash, you have to either immediately withdraw the taxable 75% as well, or use it to buy an annuity, rather than leave it on the pension. However if they do this, it is a quirk of the particular pension scheme that you are using and not a general rule, and you should be able to get round it by transferring your money to a more modern pension which is set up for flexible drawdown.

frankiesowner

Again thanks for the responses. I've now learnt that I can withdraw the 25% tax free and the rest 'sits' in the pension 'pot' from which I can drawdown. Anything I draw will be taxable income - dependent on my status. I am a retired pensioner so the £10k limit on future pension contribution isn't an issue. The other point I've learnt, which I believe to be true, is that in the remaining pot any gain the investment makes will not be subject to CGT (although I hope the operator at the end of the phone understood my point :-))

Albermarle

frankiesowner said:

Again thanks for the responses. I've now learnt that I can withdraw the 25% tax free and the rest 'sits' in the pension 'pot' from which I can drawdown. Anything I draw will be taxable income - dependent on my status. I am a retired pensioner so the £10k limit on future pension contribution isn't an issue. The other point I've learnt, which I believe to be true, is that in the remaining pot any gain the investment makes will not be subject to CGT (although I hope the operator at the end of the phone understood my point :-))

Maybe you have also learnt that it is still possible to pass on any unused pension pot to whoever you like. 
From 2027 they will be included in inheritance tax calculations, but that would only affect you is if your whole estate ( including home, savings and unused pension pot ) would be large enough to be subject to IHT. 

The unused pension pot will NOT automatically be charged IHT, and most will not pay any.