Timing of pension withdrawals in a higher tax bracket

Pat38493

This might be total nonsense(!), but I am wondering if I can optimise my tax situation and effectively transfer some of my risk to HMRC

I’m not sure if this logic works, but let’s say I have a bit too much money in my SIPP and I want to take some money out in the next higher tax bracket, but I don’t actually need to spend that money for quite a few years - I just don’t want it trapped in the pension given IHT changes etc.

If I wait for a market correction or crash, can I then sell equities at a lower price, pay a lower quantititative amount of e.g. 40% tax to take that money out, then re-invest in the same fund outside the pension.

I have now transferred money out of my pension in a state of significant equity drawdown, therefore paying less tax at the higher rate - as long as I don’t need to spend that money before the markets recover I will have reduced my lifetime tax rate?

Does this make sense or am I talking rubbish?  The only downside I can see if if the markets recover recovers so quickly that it’s already happened by the time the pension withdrawals is processed.

NoMore

It won't make a difference, if you choose to pay the tax earlier or later, you end up with the same amount.

So you have £1000, it drops 20% to £800 and you withdraw it at 40% tax to end up with £480. It then recovers 25% to £600. If instead you leave it in the Pension and draw it out after the drop and raise, you get £1000 drop to £800 and then recovers after 25% rise to £1000, which on withdrawal at 40% tax gives you £600. 

Yes you can claim you paid less tax but it makes no difference to the amount you end up with.

Pat38493

NoMore said:

It won't make a difference, if you choose to pay the tax earlier or later, you end up with the same amount.

So you have £1000, it drops 20% to £800 and you withdraw it at 40% tax to end up with £480. It then recovers 25% to £600. If instead you leave it in the Pension and draw it out after the drop and raise, you get £1000 drop to £800 and then recovers after 25% rise to £1000, which on withdrawal at 40% tax gives you £600. 

Yes you can claim you paid less tax but it makes no difference to the amount you end up with.

You are right but I am thinking about it more as a one time or x number of times thing.  Let’s say I want to transfer out of the pension into ISA,  an extra x number of units of my fund once.  I can either do it this year when equities are at all time high, or I can do it in 2 years from now at maybe 20% lower valuation and then wait more time for the value to recover outside the pension.  If that happens, I won’t be withdrawing another x units later at 40% tax  because I don’t need it anymore - it’s a finite amount that I want to get.

If the equities always stay at all time high and I need that money, obviously I have to withdraw it later on anyway but I am no worse off based on your example. (Or I can just decide to leave it in the pension)

I am most likely bumping against the 40% tax rate - my baseline plan is to withdraw up to the 40% limit every year, which satisfies my long term plan.   If I believe I am going to end up with too much in my pension at end of life, that’s when I am looking to take out amounts at 40% tax but this doesn’t necessarily have to be done in a particular year, although it would be nice to have more spending money for whatever reason.

grumpsthegit

NoMore said:

It won't make a difference, if you choose to pay the tax earlier or later, you end up with the same amount.

So you have £1000, it drops 20% to £800 and you withdraw it at 40% tax to end up with £480. It then recovers 25% to £600. If instead you leave it in the Pension and draw it out after the drop and raise, you get £1000 drop to £800 and then recovers after 25% rise to £1000, which on withdrawal at 40% tax gives you £600. 

Yes you can claim you paid less tax but it makes no difference to the amount you end up with.

You would also be liable to CGT once it is outside the Pension depending on how much if you have used up your 3k annual allowance