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Better Rates or Pension Drawdown

1spiral
Posts: 340 Forumite

My partner was a tax payer last year due to income from savings. This year we are purchasing a house so their income will be reduced such that they won't be a tax payer. They have funds in flexible isa's.
My question is would you fill the tax free void by removing funds from isa's in order to generate extra taxable income or would you leave the money in the isa's and take a pension drawdown to fill the gap?
My guess is they will be about 3K from the tax paying threshold.
My thought is the latter because the extra to generate 3K of income would require about 70K for the year so about 140K for half a year (which they don't have anyway) from now till eoty.
The 0.3-0.4% extra rate available on non isa accounts would generate about an extra £280 interest whereas taking a similar sum from the pension would save about £600 in tax as a non tax payer.
It is likely that this situation will re-occur each year from now until state pension which is 9 years away. Once this kicks in any drawdown from the pension will be taxable.
They have previously made a withdrawal from the pension a few years ago.
To me the drawdown seems a no brainer. Am I missing anything?
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Comments
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1spiral said:My partner was a tax payer last year due to income from savings. This year we are purchasing a house so their income will be reduced such that they won't be a tax payer. They have funds in flexible isa's.My question is would you fill the tax free void by removing funds from isa's in order to generate extra taxable income or would you leave the money in the isa's and take a pension drawdown to fill the gap?My guess is they will be about 3K from the tax paying threshold.My thought is the latter because the extra to generate 3K of income would require about 70K for the year so about 140K for half a year (which they don't have anyway) from now till eoty.The 0.3-0.4% extra rate available on non isa accounts would generate about an extra £280 interest whereas taking a similar sum from the pension would save about £600 in tax as a non tax payer.It is likely that this situation will re-occur each year from now until state pension which is 9 years away. Once this kicks in any drawdown from the pension will be taxable.They have previously made a withdrawal from the pension a few years ago.To me the drawdown seems a no brainer. Am I missing anything?
If the extra £3,000 is simply utilising her unused Personal Allowance then won't she have the full savings starter rate band available to use against any taxable interest (£5,000 interest taxed at 0%) 🤔
And once that is used there is the savings nil rate band to use (aka Personal Savings Allowance).0 -
Notwithstanding what D&C has said above, unless MPAA has not already been triggered, and you want to keep it that way, I suspect there are very few scenarios more tax efficient to withdraw funds from an ISA in order to use the interest on that to use up tax free cash allowance rather than drawing down a pension to use up that allowance.
Using drawdown to utilise the tax free allowance (or to the upper end of a non-higher rate tax bands), and then using ISA funds thereafter is a very common (and advocated) manner in which to best utilise your tax allowances into retirement.1 -
My question is would you fill the tax free void by removing funds from isa's in order to generate extra taxable income or would you leave the money in the isa's and take a pension drawdown to fill the gap?
As I understand it, anything removed from an ISA is effectively "outside" tax, so won't count against personal allowance - if that's what you were thinking.0 -
LHW99 said:My question is would you fill the tax free void by removing funds from isa's in order to generate extra taxable income or would you leave the money in the isa's and take a pension drawdown to fill the gap?
As I understand it, anything removed from an ISA is effectively "outside" tax, so won't count against personal allowance - if that's what you were thinking.
"The 0.3-0.4% extra rate available on non isa accounts would generate about an extra £280 interest "0 -
Thank you all for your replies.MPAA has previously been triggered.To clarify further the 3K under includes all of the allowances they're entitled to as a non working ,income only from interest, person. (17k or so including the transfer of marriage allowance.)What I'm seeking clarification on is whether it is best to fill this 3K void by pension drawdown or utilising the funds in the isa's to generate taxable interest at an amount that is below 3K.My thought as explained above is there is about a £600 tax benefit from the drawdown ( because they won't be paying 20% tax on the 3K whereas if they wait until retirement, that 3K drawdown will generate tax at the prevailing rate) whereas the extra interest generated by using the isa is only about £280 and this income is also then generated outside of the isa wrapper.Am I missing an obvious reason as to why the drawdown is not the best option?0
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1spiral said:Thank you all for your replies.MPAA has previously been triggered.To clarify further the 3K under includes all of the allowances they're entitled to as a non working ,income only from interest, person. (17k or so including the transfer of marriage allowance.)What I'm seeking clarification on is whether it is best to fill this 3K void by pension drawdown or utilising the funds in the isa's to generate taxable interest at an amount that is below 3K.My thought as explained above is there is about a £600 tax benefit from the drawdown ( because they won't be paying 20% tax on the 3K whereas if they wait until retirement, that 3K drawdown will generate tax at the prevailing rate) whereas the extra interest generated by using the isa is only about £280 and this income is also then generated outside of the isa wrapper.Am I missing an obvious reason as to why the drawdown is not the best option?
Without that it comes across as though 20% tax could well be payable on the extra £3,000 pension.0 -
Dazed_and_C0nfused said:1spiral said:Thank you all for your replies.MPAA has previously been triggered.To clarify further the 3K under includes all of the allowances they're entitled to as a non working ,income only from interest, person. (17k or so including the transfer of marriage allowance.)What I'm seeking clarification on is whether it is best to fill this 3K void by pension drawdown or utilising the funds in the isa's to generate taxable interest at an amount that is below 3K.My thought as explained above is there is about a £600 tax benefit from the drawdown ( because they won't be paying 20% tax on the 3K whereas if they wait until retirement, that 3K drawdown will generate tax at the prevailing rate) whereas the extra interest generated by using the isa is only about £280 and this income is also then generated outside of the isa wrapper.Am I missing an obvious reason as to why the drawdown is not the best option?
Without that it comes across as though 20% tax could well be payable on the extra £3,000 pension.
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