Pension pot drawdown

Newry1

Carried out recent improvements to home and needed to access funds from my pension pot

I needed to access £15000 to make payment and as a standard rate tax payer thought I would need to withdraw a £18000 gross. However it transpired that I would need to withdraw £25000 to meet my commitments and in doing so pushed me into the 40% income tax bracket all be it that the overpaid tax was recoverable and some will be repaid. But as well as putting me into a higher tax bracket it had the effect of reducing my pot unnecessarily by £7000 and reducing my tax free allowance on earned interest by £500. Why is tax not deducted at standard rate from pension pots and then adjusted on annual tax return if necessary.

molerat

Tax on pension pots works in exactly the same way as tax on employment. I suspect the vast majority would not be happy with receiving a bill in the middle of the following tax year when that money has long been spent.

Albermarle

https://forums.moneysavingexpert.com/discussion/6673064/pension-pot-drawdown

Well one potential drawback, would be if people got an unexpected tax bill once the tax year ended. Cue lots of complaints about why they were not taxed enough in the first place.

QrizB

Welcome to the forum!

I needed to access £15000 to make payment and as a standard rate tax payer thought I would need to withdraw a £18000 gross.

Was this a UFPLS lump sum from an uncrystallised pension pot, or drawdown from a crystallised one?

If UFPLS, 25% will be tax-free. If drawdown, it won't be.

However it transpired that I would need to withdraw £25000 to meet my commitments and in doing so pushed me into the 40% income tax bracket

This is an unfortunate consequence of taking a large lump sum in the middle of a tax year. It's why a cash buffer in eg. an ISA is so useful. If you'd had £15k in an ISA you could have drawn an extra £1000 a month from your pension over 15-18 months to replenish it.

vacheron

It is generally advised that retirees using drawdown / UFPLS should keep 1-3 years of expenses as a cash buffer, primarily so they don't have to sell assets in a depressed market, but it also facilitates larger ad-hoc payments such as these should they come along.

dunstonh

Why is tax not deducted at standard rate from pension pots and then adjusted on annual tax return if necessary.

Pay as you earn doesn't work that way.

But as well as putting me into a higher tax bracket it had the effect of reducing my pot unnecessarily by £7000 and reducing my tax free allowance on earned interest by £500.

To be fair, they were choices you made. It wasn't forced upon you. Possibly down to a lack of planning on your part. It only takes about a month to two months to get a refund from HMRC. Most people carry a cash float outside of the pension. And if they know they've got something coming up, they'll draw it well in advance.

itsthelittlethings

If it's put you in a higher tax bracket you are no longer a basic rate taxpayer and I don't see how you could reclaim the tax.

Linton

https://forums.moneysavingexpert.com/discussion/6673064/pension-pot-drawdown

The reason is that pensions are taxed under PAYE in the same way as wages. It is a major ongoing task to ensure that it is updated in line with budget changes. There are a large number of people trained in its operation and plentiful software.

PAYE was designed many years ago with major objectives being

- to minimise the danger that ordinary wage earners could face a large tax bill at the end of the year when they may not have the money on hand to pay it.

- to minimise the need for most people to complete a tax return.

- To run automatically with minimum administration.

it would be unjustifiable to bring in a different income tax system system solely for drawdown pensions.

QrizB

If it's put you in a higher tax bracket you are no longer a basic rate taxpayer and I don't see how you could reclaim the tax.

If the OP has paid £10k in tax, that's 40% on the entire £25k. Unless their income for the year was already right at the top of the basic rate band, some of that £25k is only liable to tax at 20%. That's the bit they'll be able to reclaim.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82039843#Comment_82039843

I suppose I am the only one who found the tax of precisely 40% of the £25k to be a bit strange. It is almost as if the OP had a D0 tax code. If it was an emergency code then surely some tax would have been deducted at all the different rates (including 45%) not a straight 40%.

molerat

If it was £25K from a crystallised pot then tax using 1257LX would be £9628.20 so close enough to £10K.