Early retirement next year, is it worth adding to my pension?

NoMore

Help taking your pension | MoneyHelper

Work your way through those articles, they cover all the basics on how to take your DC pension. I would also schedule a meeting with them where they talk you through it one to one. Its free.

mrklaw

if you draw UFPLS from your pension 25% is tax free and 75% is taxable

however - if that 75% fits inside your 12570 personal allowance you won’t pay tax on it.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82119050#Comment_82119050

With a DC pension where no money has been withdrawn, it is called an uncrystallised pension pot. So in your example you would have £25K uncrystallised.

If you request to take say £2000 of tax free cash, then £8000 will be crystallised. You will get £2000 tax free cash to your bank account and in your pension there will now be £17,000 still uncrystallised and £6000 crystallised.

Any withdrawals from the crystallised part are classed as taxable income ( whether you actually pay tax depends on your overall tax position) . From the £17,000 uncrystallised part you can still take 25% of it tax free.

There are two basic methods.

UFPLS - each withdrawal is exactly 25% tax free and 75% taxable

FAD ( drawdown) - you can take some tax free on its own , or with taxable income ( at the same time or later)

Key factor is that not all pension providers offer all options . For example a provider offering FAD may insist you withdraw all the 25% tax free, before taking any taxable income, and some will not.

There was a link to Moneyhelper in a previous post, and you can get an hour long free chat with PensionWise as part of the same service. Also read your providers website info.

MallyGirl

maybe a cake analogy might help?

You have a carrot cake with a thick cream cheese frosting. The cake bit is 75% and is taxable and the frosting is 25% and is tax free.

UFPLS is taking a conventional slice of the cake complete with frosting. You will be liable for tax on the cake.

FAD is taking some or all of the frosting, maybe along with some of the cake. Any remaining frosting is still tax free when you take it in the future. If you just take cake in the future, because you have already had the frosting off it, then it will be taxable (although it may not cost you any tax if your total income is under the 0% threshold). If you have enough frosting left to take another conventional slice then it could be take as UFPLS as above.

Just like real life you can't take just the cake and leave the frosting in - very messy!

maybe that is no help at all now I have read that back 😆

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82119953#Comment_82119953

Good way of explaining it 👍

However worth reminding us all that we can’t have our cake and eat it !