A quick question regarding tax

Johnny_P · 28 October 2019 at 9:25AM

Hi
I would be grateful for opinion as to whether my understanding about tax for a pension pot option is correct:
Based on: £200K in a pension pot (defined contribution).
I don't need to take a pension from the £200K pot to live right now.
So, am I right in saying:

Option 1:
If I move the £200K into a drawdown pot then I can take £50K tax free and then the remainder is available as taxable out of the drawdown wrapper. And here is the critical bit: all future growth is then also 100% taxable?

Option 2
If I leave the £200K in the current pot and then crystallise smaller amounts via drawdown as I need them then each small pot is 25% tax free. And again here is the critical bit, the interest earnt in the remaining main pot remains available to me to then take into drawdown at 25% tax free.

So the critical element as I understand it is that if my pot in drawdown (option 1) earns £10K of interest then it is all taxable, but if I earn £10K of interest in option 2 main pot then it is simply building my pot and so potentially my 25% tax free lump should I take it like that in the future.

So if I don't need my 25% lump from a complete move to drawdown I would be better off leaving it alone to grow my tax free.
or is there a way to take the 25% tax free earnt from interest out of a drawdown pot?
cheers
Johnny

pip895 · 28 October 2019 at 9:59AM

That is pretty much my conclusion - no point taking the tax free cash until you have something to do with it. Taking smaller chunks should allow better tax planning further forward + everything in the pension remains outside your estate for IHT purposes too.

Johnny_P · 28 October 2019 at 10:03AM

Thanks Pip895.
I would appreciate a specific tax answer from those more knowledgable than I to the question:

Under my option 1, is all future interest on the fund taxable or is there a way to take 25% free from tax earnt within the drawdown wrapper?
Johnny

pip895 · 28 October 2019 at 10:29AM

The pension wrapper itself is like an isa in that you don't have to worry about capital gains or interest within it but once crystallised everything you take out is potentially taxable.

The saving grace is that you have a tax allowance so in practice you may not pay 20% on all you take out..

Triumph13 · 28 October 2019 at 10:50AM

Assuming you put the TFLS into an ISA it makes absolutely no difference. In either case 75% of the total investment growth is taxable, 25% is tax free - either because it is on uncrystallised funds so you can draw it 25% tax free, or because 25% of the asset is already sitting in an ISA and so tax free.

Brynsam · 28 October 2019 at 10:51AM

Johnny_P wrote: »

T
Under my option 1, is all future interest on the fund taxable or is there a way to take 25% free from tax earnt within the drawdown wrapper?
Johnny

Responding specifically to your question:

If you take 25% tax free cash at the outset, the whole of the rest of your pot (including investment returns on that 'rest of your pot') is taxable, assuming you've already used up your personal allowance for the year in which you draw it. In that scenario, there is no way to take 25% of the investment returns tax free.

Albermarle · 28 October 2019 at 11:04AM

There is also an Option 3)

You take the tax free cash in stages - No need to take the whole 25% out at once for most modern pensions .
So you will have some tax free cash in your pocket . 3X that amount will be crystallised in a taxable drawdown pot and the rest remains uncrystallised.
Later you can take more tax free cash and also some taxable income if you wanted to , in proportions that suit you.

It sounds similar to Option 2 ) which is known as UFPLS in the jargon . However in this case each with drawal has to be exactly 25% TFC and 75% taxable.

xylophone · 28 October 2019 at 12:43PM

Are you planning to give up work altogether after you turn 55?

https://forums.moneysavingexpert.com/showthread.php?p=75584536#post75584536

and thanks Xylophone yes I have a state forecast, am OK with 33 years, £10 short a month of maximum.

Re voluntary contributions.

https://www.royallondon.com/siteassets/site-docs/media-centre/good-with-your-money-guides/topping-up-your-state-pension-guide.pdf

Johnny_P · 28 October 2019 at 8:18PM

Thank you everyone.
Advice and confirmation much appreciated
Johnny

Johnny_P · 28 October 2019 at 8:27PM

xylophone
yes all sorted. Just a few days to go.
I have decided to take my final salary pension pot as a front loaded pension to secure a known pension payment and front end load to balance with my state pension and to spread my risk rather than take the lump sum option, attractive as it was.
Just leaves my DC pots, which I have now consolidated into 1 provider with the plan to take as a drawdown rather than move to a SIPP basically because I feel I have sufficient option and control within drawdown without having to go to a fully self managed SIPP.
The advice I had here previously really did get me on the right track.I am now just on the detail of the drawdown process for best tax position.

zagfles · 28 October 2019 at 8:34PM

Triumph13 wrote: »

Assuming you put the TFLS into an ISA it makes absolutely no difference. In either case 75% of the total investment growth is taxable, 25% is tax free - either because it is on uncrystallised funds so you can draw it 25% tax free, or because 25% of the asset is already sitting in an ISA and so tax free.

Indeed, tax wise it's identical (assuming tax rates and your marginal tax rate don't change), but there are peripheral issues to consider like IHT, as an ISA would count towards the IHT threshold but a pension wouldn't, and possibly stuff like benefits.

A quick question regarding tax

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