Pension drawdown and tax; now or later?

MrGentlyBenevolent

I am in receipt of the state pension, but have a pension fund that needs a decision.

I will I draw out the 25% as cash and put it into savings or ISA.

If there is little tax free entitlement left, am I better taking it and putting it into a savings account; 4.5% seems available, and pay the 20% tax now, or get an fixed term annuity say ten years, and pay tax on the annual payment?

(or pessimistically keep a suitcase of cash for when the markets crash due to planet's fragile state?)



"The rule is, jam tomorrow and jam yesterday-but never jam today It must
come sometime to jam today, Alice objected No it can't said the Queen
It's jame every other day. Today isn't any other day, you know"

dunstonh

I am in receipt of the state pension, but have a pension fund that needs a decision.

Why does it need a decision?

Typically, the only pensions that need a decision are those that are old and cannot be held past age 75. Is that the case here?

I will I draw out the 25% as cash and put it into savings or ISA.

In most cases, leaving the tax-free cash in place inside the pension is the most tax-efficient option until you are getting close to age 75 where taking it and putting it into a stock and shares ISA is usually more tax efficient.

Taking it and putting it into a savings account or cash ISA is not normally a good idea unless it forms part of a wider planning objective where you need the cash in the short term (i.e., typically less than five years). Or where it offsets other risk-based investments.

If there is little tax free entitlement left, am I better taking it and putting it into a savings account; 4.5% seems available, and pay the 20% tax now, or get an fixed term annuity say ten years, and pay tax on the annual payment?

How does a fixed-term annuity fit with your objectives?

DRS1

If there is little tax free entitlement left, am I better taking it and putting it into a savings account; 4.5% seems available, and pay the 20% tax now, or get an fixed term annuity say ten years, and pay tax on the annual payment?

When you talk about tax free entitlement I assume you are talking about the personal allowance (and maybe the personal savings allowance and the starter rate for savings). Is that right?

Do you have savings interest which uses the personal savings allowance and the starter rate?

If you just have the state pension and that is less than the personal allowance then it might be a good idea to take as much taxable income from the pension as will use up the remainder of the personal allowance.

But there is the question of the promise made by the former Chancellor about people who ONLY receive the state pension You might want to see how that pans out. Or maybe it is only people with a state pension over the personal allowance who will be interested in that.

But if you have other taxable income then you should not wait.

Maxing out the personal allowance (and those other 0% bands if you have savings interest) would be sensible. It is use it or lose it. And every year that passes the state pension increases will eat away at the balance of your personal allowance.

You won't want to take too much from the pension in case it eats away at the starter rate band - if you are using it. I don't know the figures but a fixed term annuity may well do that. With flexi access drawdown you can control the amount of taxable pension income you take each year (reducing it to take account of the increases to state pension).

And bear in mind that when you start to get a taxable pension income whether it is an annuity or drawdown you will be in PAYE territory with tax codes you may want to query with HMRC.

UKTaxHelper

On the PAYE point, the first taxable payment usually comes out on an emergency code. You claim the overpayment back, it doesn't wait for year end.