Avoiding the 40% tax on pension pot withdrawal

maxaxe

My understanding is that at 55 (soon 57), I can start to withdraw from my pension pot. I can take 25% of the pot up to £268275 tax free and then £50270 per year at 20% tax (or less), assuming I have no other income.

How big (small?) a pot do I need to avoid the higher rate tax in my lifetime and still withdraw the whole pot? I know it's not a sin to pay higher rate tax, but it does factor into how much pot I want to build before retirement.

This question relies on many unknowns including rates of return (I'm currently 100% in equities), state pension amounts (I'm currently on 8 years of NI contributions, probably will max out before 67), future law changes (I personally don't think the tax free amounts will increase in my lifetime, it may be replaced) how long I live (I guess 82 is the median uk lifespan), risk tolerance (I can tolerate a 20% rate of failure, possibly more), and any taxable income post 57 (I don't know). Can someone give a rough ballpark figure? Maybe around £1 million at 57? How may I get a more precise estimate for me - happy to do a little spreadsheeting myself? Are there other major factors that I've missed?

mrklaw

about 1.3-1.4m

also bear in mind you can draw up to 50270 but only pay 20% on 37700 (ish) of it as you have the personal allowance (at least until state pension age).

at state pension age safer to assume you reduce your withdrawal to 37700 with the state pension taking the first chunk of personal allowance.

many will take the tax free alongside (if they don’t have eg a mortage to pay off then you’re removing it from a tax sheltered location and will be exposed to income tax on interest and it’ll take a long time to get sheltered again if you do it on one go).

if you draw alongside taxable then the amount you can draw increases by 33%

pre-SP : 50270+33%=66,859.1

post-SP: 37700+33%=50,141

QrizB

I think you're asking a question that's impossible to answer.

If you want to know a typical range of outcomes, there are tools like cFIREsim that will test your plan against historical outcomes.

Just for example, starting with £1M and taking £50k pa for a 30-year retirement (with no other changes to the default model) has a 25% chance of running out of money before death but on average you'll finish with more than you started with.

kermchem

OP says they have 8 years of NI contributions and expects to max out (35 years?) by the time they reach SP age. SP age will not be 67 in 27 years. Thresholds will not have been frozen for all 27 years. SP will be £30K to £40K in 27 years depending on inflation and how many locks are left.

It is a fair question to ask how to plan your retirement given at leat 6 changes of government / economic strategy along the way. If only all politicians would realise that pension policy stability is what encourages savings.

BikingBud

That really is extreme crystal ball gazing.

I do find its a case of control what you can, commit what you can afford but make sure you live this life and do not limit your enjoyment now on the basis of saving everything for tomorrow.

maxaxe

https://forums.moneysavingexpert.com/discussion/comment/82042504#Comment_82042504

Thank you for your response.

I always assumed that if you are already maxing out the £268250 limit on pension pot withdrawal, it was more tax efficient to take it all out at the start asap (ie at 57). Because you can never take more than that amount out tax free regardless of how much it grows in the pension wrapper and you pay 20% marginal tax on the rest.

At least outside of pension, I can put it slowly into ISA and use my CGT and dividend tax free allowances in a GIA?

I would also like to structure my mortgage around this tax free lump sum if possible… but that may be another thread

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/82042630#Comment_82042630

You are already getting into added complexity as there strictly isn't a dividend "allowance".

There is a dividend rate of 0%, for the first £500 of dividend income, but if you had £50,270 of (taxable) pension income and £500 if dividend income you might pay £0 tax on the dividends but you would be deemed a higher rate payer for Marriage Allowance purposes. Which not be an issue for you but it would be for some people.

Always assuming we have 0% tax bands and Marriage Allowance in the future of course!

maxaxe

https://forums.moneysavingexpert.com/discussion/comment/82042638#Comment_82042638

But am I still always better off (or at least as well off) if I take the full tax free allowance as soon as I can, on the assumption that my pension pot is over £1.073million? So I can use my allowances

maxaxe

https://forums.moneysavingexpert.com/discussion/comment/82042517#Comment_82042517

Cool website. I had a quick look, but need a bit more time to play with it. It doesn't quite answer my question regarding tax efficiency fully, but the simulations are great!

maxaxe

https://forums.moneysavingexpert.com/discussion/comment/82042625#Comment_82042625

Fair comment. If the answer is that this is too uncertain so no point in modelling, that is a reasonable response.

But if it could be estimated precisely or approximately, then it would definitely impact when I choose to stop pot building

QrizB

All things considered, I think "assuming no changes to the taxation of pensions or income" for the next 47 years (17 years to access pension at 57, 10 more years to SPA, then another 20 years of retirement) is probably unrealistic. Just look at the changes that have happened in the 11 years since the" pension freedoms" came in!

It's an interesting academic exercise, no doubt, but not especially helpful when trying to decide how much DC pension is too much.