Avoiding the 40% tax on pension pot withdrawal

BikingBud

But it is not as simple as how big your pot is though.

Pensions football and tax and politics of envy will ensure that everything will change significantly at least twice.

Set some basic rules eg - https://www.questachartered.co.uk/financial-planning-priorities-for-2026/

Also understand how change can be exploited for your benefit.

Stay aware and keep adjusting.

DRS1

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

I think you are right about taking out the maximum lump sum as soon as possible if you have hit the LSA. If you leave it in the pension any growth will just add to your taxable pension income. And the value of the lump sum will diminish over time thanks to inflation.

But there is an issue as to what you do with it once it is out of the pension. You could get some of it in an ISA. But not a lot of it. You could pay off the mortgage. You could buy premium bonds. You could invest in low coupon gilts with a clean price of less than 100. Or you could go on a round the world cruise for a couple of years. Whatever you do have a plan for how you will use the lump sum.

But you also need to keep in mind is that the law could change and we may have a new version of the lifetime allowance and in that case you may not want any money in your pension above the LTA.

maxaxe

https://forums.moneysavingexpert.com/discussion/comment/82042704#Comment_82042704

Of course I need to decide what to do with it once I have taken the lump sum. But I can do anything that it could do in my pension, i.e. the same investments etc. in a ISA or GIA. Just outside the pension is more flexible, as you mention, in that I could buy a holiday or premium bonds or mortgage. So it's better outside pension than inside pension in any case.

RogerPensionGuy

Points that pop in my head.

Personal allowances were frozen 5 years ago and currently 5 more years to run, they call it fiscal drag and I don't like it.

The LTA has gone down, up, down, sideways, up, down over the last many years, who knows what will occur next with it.

The AA has also gone down, down, down and then a 50% increase up, another who knows.

MPAA moved up 150% up a few years back.

CGT was 12.3K just a few years ago and now reduced more than 75% to just 3K.

The many goalposts just keep moving and very tuff trying to plan, I did plenty of guessing during my last 10 years of paid employment and am continuing to guess best ways forward.

Housing and pensions have much wealth inside them and pretty easy to prune these vehicles and I'm guessing pruning will be ramped up on these vast wealth pots available to fund the UK books.

I try not to be fixated on trying to achieve the optimum best results for me and more focus on trying to be balanced & covering various angles that hopefully will pan out as a fair to good outcome and just don't get upset with them moving goalposts and indeed the goalies who are on the line.

The OP may like the link below for a bit of reference.

*****

https://www.guiide.co.uk/

eskbanker

I'm currently on 8 years of NI contributions

You don't mention your age but are you eight years into your working life or have you perhaps spent significant time outside the UK?

Long term modelling and planning is undoubtedly beneficial but if you're potentially contemplating scaling back pension contributions at some point, with an aim of avoiding the current higher rate regime, that does seem to be in danger of letting the tax tail wag the investment dog, but perhaps less so if you're a stellar high earner shifting seriously large sums into pension…

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82042836#Comment_82042836

Retirement tax planning can become ridiculously complicated because it depends on so many “what ifs.” But in general I think it’s a good idea to have money in ISA and GIAs as well as DC pensions to give you flexibility. It’s also good to actually do something: don’t become paralyzed by the choices.

I’m in the USA, but all my heirs are in the UK so I am moving money from DC pensions to the US equivalent of an ISA so that my heirs won’t have a big income tax bill when they inherit. This gives me a tax bill today, but it’s at a marginal rate of 24% which is better than the 40% bill ( or higher) they would face if I left it in the US DC pensions. This might not be the best solution when everything is done, but it has some logic today. I hope to have at least 20 years to implement my plan and that’s another important aspect to tax planning-the more time you have the better.

maxaxe

https://forums.moneysavingexpert.com/discussion/comment/82042836#Comment_82042836

For context, I am 32 and about 5 years or so into my working life. I have 8 years of NI contributions due to credits built up whilst studying (not entirely sure why, but I did check my gov portal and that's what it said).

I appreciate the tax tail and all that, just that I'd like to stop working once my pot is big enough. I estimate my retirement lifestyle to be less than £50k per year, but still not sure exactly what yet (I find this problem really hard). I have yet to have all wanted children and yet to buy a house. So this figure represents a tax efficiency figure that could inform my desired retirement pot.

I don't have a huge salary, but my gross salary makes me a higher rate payer. It would also clearly be inefficient for me to pay into pension to below the higher rate tax band (which I'm currently doing) and then pay 40% income tax in retirement.

I would prefer not to scale back contributions and instead stop working if my pot is big enough. And think aboutISA bridge if needed etc.. which could be another post

eskbanker

I appreciate the tax tail and all that, just that I'd like to stop working once my pot is big enough

That seems a more realistic target, as long as you retain flexibility to adjust timescales by a few years in either direction rather than fixing a specific age and trying to second guess what'll happen prior to reaching it - as time goes by, the best-to-worst range of your assumptions will gradually narrow…

kermchem

If OP took A-levels or similar (secondary education) then the tax years which include your 16, 17 and 18th birthdays will have full NI contributions. And probably without you doing anything to claim. Subsequent further or higher education with not enough summer and part-time work will not give full years.

maxaxe

Thanks for all the comments. It seems that the consensus here is that this pot size is too uncertain to predict, given the number of years before I hit the age I can withdraw my pension. So keeping abreast of changes, acting flexibly and hedging in all pots is all I can do as things become more certain over time.