Pension Drawdown

AAscam

Hi all
I've got a small pension pot of £36k with Reassure now. I'm 62 and am planning on withdrawing as much as I can from the pot over the next few years without paying any tax. My current income is only £1500 per year, so I have £11k of unused tax allowance to play with before I hit the income tax threshold of £12.5K. I will have to transfer the funds to Standard Life in order to be able to obtain flexible access to this pension pot.

My plan is to withdraw the 25% tax free sum (£9k) within a few weeks, and then withdraw a further £9k this financial year. My understanding is that this will keep me under the £12.5 tax threshold for the year 2025. I'll then withdraw another £9k in April 2026, and withdraw the final £9k in April 2027.

Are there any flaws in my not quite so cunning plan ?

NB, We will be in a good position financially when we hit state pension age, and have a decent amount of savings to fall back upon.  My not quite so cunning plan is merely to get my hands on the small pot without paying tax as I'd like to make the most of my tax situation over the next few years whilst my income is exceedingly low

Grumpy_chap

AAscam said:

Hi all
I've got a small pension pot of £36k with Reassure now. I'm 62 and am planning on withdrawing as much as I can from the pot over the next few years without paying any tax. My current income is only £1500 per year, so I have £11k of unused tax allowance to play with before I hit the income tax threshold of £12.5K. I will have to transfer the funds to Standard Life in order to be able to obtain flexible access to this pension pot.

My plan is to withdraw the 25% tax free sum (£9k) within a few weeks, and then withdraw a further £9k this financial year. My understanding is that this will keep me under the £12.5 tax threshold for the year 2025. I'll then withdraw another £9k in April 2026, and withdraw the final £9k in April 2027.

Are there any flaws in my not quite so cunning plan ?

NB, We will be in a good position financially when we hit state pension age, and have a decent amount of savings to fall back upon.  My not quite so cunning plan is merely to get my hands on the small pot without paying tax as I'd like to make the most of my tax situation over the next few years whilst my income is exceedingly low

Just to be mindful, and I think I understand why you used the term, but this pension fund doesn't meet the criteria for "small pot" (which has a specific definition in pension parlance).  It may cause confusion and/or errors if that terminology is used.

Are you currently making any pension contributions? Once you draw the taxable component (even if no tax is due) you will trigger MPAA 

AAscam

Many thanks for your reply. 

Apologies for the incorrect use of the term "small pot". I know very little about pensions and only used the term  because of the small amount of funds sitting within it.

I'm not making any pension contributions, and I do not intend to make any in the future.

singhini

With a pot size of £36,000 and the fact you are making no pension contributions and don't intend to in the future your approach is fine.
Just be mindful the pension company will give you the first £9k tax free (the 25%), however when you ask them for another £9k later on they will tax it at 20% and tell you to deal with HMRC to get that tax back.

In the following years they will probably do the same i.e. tax it and tell you to deal with HMRC if you think you should not have paid tax ------> as you have already had all of the tax free money, any money left should be subject to tax as far as they are concerned. 

AAscam

Thanks Singhini - that is exactly what I wanted to hear, and confirms what I thought (and hoped) would happen

squirrelpie

Err, I'm not sure they will tax it at 20%. If it's the first taxable withdrawal from that pension, they'll use an emergency code, and if you withdrew all £9000 at once it would be taxed at a rate a lot more than 20%! The 'trick' is to make a small initial withdrawal (somebody else will remember the exact amount) after which HMRC will issue a tax code. The tax system is set up for regular monthly withdrawals/payments so it might be best to plan on taking £9000/12 each month of the tax year. (Or £9000/n where n is the number of months remaining in this tax year). The tax should be correct at the end of every tax year if you do this, with no need to claim anything back.

Dazed_and_C0nfused

squirrelpie said:

Err, I'm not sure they will tax it at 20%. If it's the first taxable withdrawal from that pension, they'll use an emergency code, and if you withdrew all £9000 at once it would be taxed at a rate a lot more than 20%! The 'trick' is to make a small initial withdrawal (somebody else will remember the exact amount) after which HMRC will issue a tax code. The tax system is set up for regular monthly withdrawals/payments so it might be best to plan on taking £9000/12 each month of the tax year. (Or £9000/n where n is the number of months remaining in this tax year). The tax should be correct at the end of every tax year if you do this, with no need to claim anything back.

The emergency tax code, 1257L, will be used on the first taxable payment so as long it's not more than £1,048 no tax will be deducted.

@AAscam what is the existing income of £1,500 you referred to?  Pension? Earnings? Interest?

DRS1

If you don't want to draw something every month, I think the way to do it is to leave the big draw until March so draw say £500 (a figure I just picked out of thin air) in April and £8500 in March.

QrizB

AAscam said:
I'm not making any pension contributions, and I do not intend to make any in the future.

You should give some consideration to paying £2880 a year into a pension, simply to get the £720 tax relief on it. It's free money.

SVaz

Just ask for flexible drawdown,  take the tax free 25% of the yearly amount and then take a monthly income - it’s the easiest way without faffing around claiming tax back. 

E.g:  You want £11000 so take £2750 tax free then £687.50 per month.

ColdIron

It's a perfectly fine plan. I did the same by drawing down ~£12,000 per year for 9 years until I hit SP age

Is that £1,500 earnings/other pension? If savings interest (you do say "and have a decent amount of savings to fall back upon") then you may have the full PA available to you

I agree with others, taking monthly drawdown is probably the simplest way to achieve this