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  • FIRST POST
    • Sea Shell
    • By Sea Shell 18th Sep 19, 6:28 AM
    • 2,568Posts
    • 4,625Thanks
    Sea Shell
    Reclaiming Tax in Drawdown
    • #1
    • 18th Sep 19, 6:28 AM
    Reclaiming Tax in Drawdown 18th Sep 19 at 6:28 AM
    Sorry if this may have been asked before...quick question.

    If you have a DC pot of £130,000, and in year 1 you crystalise the lot and take the full 25%, (£32,500) along with your full Personal Allowance of (currently) £12,500, is it correct that you'll be put on an Emergency Tax code, and it'll be treated as a Day 1 deduction, at 40% tax. (£5000). No other income.

    As I understand it, this can be reclaimed fairly quickly using a P55 form, correct?

    If in year 2 you again draw the max PA at the start of the new tax year, in one go (rather than monthly drawdown) do you have to again complete a tax form, and is it still P55? I'm assuming a lump sum, once a year is NOT classified by HMRC as a "Regular" payment, is that so?

    Thanks everyone.


    *** Edited to add ***
    If only claiming small pot pensions, in full, in any tax year, does the same principal apply. Say, you've got a small pot of £8000, so £2000 will be tax free, and you get £6000. Do they take tax, thinking that you'll be getting £6000 per month for the rest of the tax year? Thanks.
    Last edited by Sea Shell; 24-09-2019 at 7:02 AM. Reason: Additional question added
    " That pound I saved yesterday, is a pound I don't have to earn tomorrow " JOB DONE!!
    This should now read "It's time to start digging up those Squirrelled Nuts"!!!
Page 1
    • SeniorSam
    • By SeniorSam 18th Sep 19, 8:14 AM
    • 1,342 Posts
    • 692 Thanks
    SeniorSam
    • #2
    • 18th Sep 19, 8:14 AM
    • #2
    • 18th Sep 19, 8:14 AM
    If the pension provider has been notified of your tax code, then they would not take emergency tax. Wise to contact the provider, ask if they have been notified and if not, then get appropriate references and get the tax office to send a notification. Otherwise you will have the emergency tax taken and have to reclaim later.
    I'm a retired IFA who specialised for many years in Inheritance Tax, Wills and Trusts. I cannot offer advice now, so my comments are just meant to be helpful.
    • AnotherJoe
    • By AnotherJoe 18th Sep 19, 9:10 AM
    • 15,905 Posts
    • 19,125 Thanks
    AnotherJoe
    • #3
    • 18th Sep 19, 9:10 AM
    • #3
    • 18th Sep 19, 9:10 AM
    What's the rationale behind taking out the full years allowance in one go?
    Is it it that you need that much cash so are thinking to do it over two tax years separated by a few months ?
    I think you would likely get taxed on the basis if you'd be taking 12,500 every month and have to claim it back.(the 25% tax free won't come into the calculation)
    • Sea Shell
    • By Sea Shell 18th Sep 19, 10:09 AM
    • 2,568 Posts
    • 4,625 Thanks
    Sea Shell
    • #4
    • 18th Sep 19, 10:09 AM
    • #4
    • 18th Sep 19, 10:09 AM
    Our 2 main drivers to do it that way is, fees and being able to get it all out ASAP without any tax payable. Let any growth come from reinvestment in ISA.

    If we choose a plan that charges per transaction, rather than percentage.

    We'd put the money straight into our ISAs, which we can withdraw at will, with no charge.

    As for notifying provider of tax code, would a day 1 payment still trigger tax being paid...as they don't know that's all you'd be withdrawing in that tax year?

    We're still kicking ideas around at the moment as we can't do anything until this time 2021! But we want to get organised, Sipp sorted and provider decided on in preparation.
    " That pound I saved yesterday, is a pound I don't have to earn tomorrow " JOB DONE!!
    This should now read "It's time to start digging up those Squirrelled Nuts"!!!
    • ColdIron
    • By ColdIron 18th Sep 19, 10:28 AM
    • 5,442 Posts
    • 7,470 Thanks
    ColdIron
    • #5
    • 18th Sep 19, 10:28 AM
    • #5
    • 18th Sep 19, 10:28 AM
    Why take the £12,500 in month one? If you take monthly income it will be taxed (or not) evenly
    • midlandsimon
    • By midlandsimon 18th Sep 19, 10:55 AM
    • 34 Posts
    • 16 Thanks
    midlandsimon
    • #6
    • 18th Sep 19, 10:55 AM
    • #6
    • 18th Sep 19, 10:55 AM
    Pension income is taxed under PAYE as earned income. If your providee had a P45 for the current tax year from your previous pension provider, or if they already have your tax code on file, then they will apply that tax code. If not, then HMRC require them to tax your income using the temporary rate until they issue them with a correct tax code.
    The temporary (or emergency) rate for the 2019/20 tax year is 1250L (S1250L in Scotland).
    The temporary rate works on what is known as a ‘month 1’ basis. This means that the calculation used will have only allocated 1/12th of your tax free personal allowance to your lump sum. They are required by HMRC to use this calculation even if the lumpsum is the only payment made in that tax year.

    If you’ve overpaid tax, your provider is not allowed to make ad hoc tax refunds.
    HMRC may decide to tell them to amend the tax on your future income payments to correct your tax position. Alternatively, HMRC could review your tax paid at the end of the tax year and issue a tax calculation to adjust your position. In some circumstances you may be able to make an in year claim to get back any overpaid tax.

    If the lump sum payment:
    •used up your pension pot and you have no other income, complete form P50Z
    •used up your pension pot and you have other taxable income, complete form P53Z
    •didn’t use up your pension pot and you’re not taking any more payments from the plan in this tax year, complete form P55
    •didn’t use up your pension pot, then any further income payments will carry on being taxed under the current tax code unless HMRC issues your provider with a revised tax code.
    • Sea Shell
    • By Sea Shell 18th Sep 19, 11:03 AM
    • 2,568 Posts
    • 4,625 Thanks
    Sea Shell
    • #7
    • 18th Sep 19, 11:03 AM
    • #7
    • 18th Sep 19, 11:03 AM
    So can you continue to use form P55 in subsequent years?

    It may be that monthly is more straight forward...like I said, we're kicking ideas around.
    " That pound I saved yesterday, is a pound I don't have to earn tomorrow " JOB DONE!!
    This should now read "It's time to start digging up those Squirrelled Nuts"!!!
    • NoMore
    • By NoMore 18th Sep 19, 12:04 PM
    • 408 Posts
    • 396 Thanks
    NoMore
    • #8
    • 18th Sep 19, 12:04 PM
    • #8
    • 18th Sep 19, 12:04 PM
    Also interested in this question, as I intend to use my SIPP to only cover 5 years so essentially on commencement of drawdown it will be mostly cash earning almost zero interest in the SIPP. Getting it out ASAP as tax efficiently as possible is my aim.
    • midlandsimon
    • By midlandsimon 18th Sep 19, 2:59 PM
    • 34 Posts
    • 16 Thanks
    midlandsimon
    • #9
    • 18th Sep 19, 2:59 PM
    • #9
    • 18th Sep 19, 2:59 PM
    Why does the cash have to be earning zero interest in the SIPP. It can remain invested then returned to the cash fund as and when required by the provider.
    • NoMore
    • By NoMore 18th Sep 19, 3:05 PM
    • 408 Posts
    • 396 Thanks
    NoMore
    As I said I am withdrawing the whole of the SIPP over 5 years, on a short timescale I don't want to be invested in equities
    • AnotherJoe
    • By AnotherJoe 18th Sep 19, 7:46 PM
    • 15,905 Posts
    • 19,125 Thanks
    AnotherJoe
    Our 2 main drivers to do it that way is, fees and being able to get it all out ASAP without any tax payable. Let any growth come from reinvestment in ISA.


    But you can leave it invested in the same investments in the pension and withdraw more slowly.


    If we choose a plan that charges per transaction, rather than percentage.

    Why not choose a plan that doesnt charge at all for withdrawals instead?


    We'd put the money straight into our ISAs, which we can withdraw at will, with no charge.
    I can take my money out of my SIPP with no charge.



    As for notifying provider of tax code, would a day 1 payment still trigger tax being paid...as they don't know that's all you'd be withdrawing in that tax year?

    We're still kicking ideas around at the moment as we can't do anything until this time 2021! But we want to get organised, Sipp sorted and provider decided on in preparation.
    Originally posted by Sea Shell

    Where is the money now if its not in a SIPP? Or are you looking to move it to a different SIPP?
    Please dont criticise my spelling. It's excellent. Its my typing that's bad.
    • AnotherJoe
    • By AnotherJoe 18th Sep 19, 7:47 PM
    • 15,905 Posts
    • 19,125 Thanks
    AnotherJoe
    Also interested in this question, as I intend to use my SIPP to only cover 5 years so essentially on commencement of drawdown it will be mostly cash earning almost zero interest in the SIPP. Getting it out ASAP as tax efficiently as possible is my aim.
    Originally posted by NoMore

    HL would be one of the cheapest SIPPs for this.
    Please dont criticise my spelling. It's excellent. Its my typing that's bad.
    • Audaxer
    • By Audaxer 18th Sep 19, 9:05 PM
    • 1,872 Posts
    • 1,172 Thanks
    Audaxer

    But you can leave it invested in the same investments in the pension and withdraw more slowly.
    Originally posted by AnotherJoe
    I think SeaShell's plan is to effectively 'move' investments worth £12,500 from her SIPP each year into her S&S ISA. So I think it makes sense to withdraw the full personal tax allowance in one transaction each year from the SIPP and reinvest it immediately in the S&S ISA.
    • AnotherJoe
    • By AnotherJoe 19th Sep 19, 6:37 AM
    • 15,905 Posts
    • 19,125 Thanks
    AnotherJoe
    Will it make any difference if the investments are the same?
    eg say SS is invested in Acme in the SIPP, takes out 1/12 each month and reinvests in Acme in an ISA.
    For many investments there wont be any additional costs, especially funds.
    For some, mostly shares, there will be transaction charges though even those would be much lower if it were a regular investment they set up.

    So it would depend what the investments were.
    • Sea Shell
    • By Sea Shell 19th Sep 19, 6:39 AM
    • 2,568 Posts
    • 4,625 Thanks
    Sea Shell
    Where is the money now if its not in a SIPP? Or are you looking to move it to a different SIPP?
    Originally posted by AnotherJoe
    The pensions are ex. employers schemes, with Aviva and Aegon. DH has changed the underlying funds in which the investment are, so does this make them SIPP's by definition?

    We plan to consolidate these together and then put the whole pot into drawdown. Provider and platform yet to be decided on....hence the questions.

    He wants to get all the money out in 10 years, because he has DB pensions that kick in at 65. Actually it'll be over 9 years, as he has a couple of small pots to take year 1, as they'll just come under his PA.
    " That pound I saved yesterday, is a pound I don't have to earn tomorrow " JOB DONE!!
    This should now read "It's time to start digging up those Squirrelled Nuts"!!!
    • Sea Shell
    • By Sea Shell 19th Sep 19, 6:42 AM
    • 2,568 Posts
    • 4,625 Thanks
    Sea Shell
    I think SeaShell's plan is to effectively 'move' investments worth £12,500 from her SIPP each year into her S&S ISA. So I think it makes sense to withdraw the full personal tax allowance in one transaction each year from the SIPP and reinvest it immediately in the S&S ISA.
    Originally posted by Audaxer
    Yes, exactly this. We may even move the money to exactly the same investment, just within the ISA wrapper rather than Pension.

    This way we pay minimal tax (none) and then can withdraw from the ISA whenever we like, without paying any tax. If the money is left to grow in the pension, its going to take longer to withdraw!!
    Last edited by Sea Shell; 19-09-2019 at 6:45 AM.
    " That pound I saved yesterday, is a pound I don't have to earn tomorrow " JOB DONE!!
    This should now read "It's time to start digging up those Squirrelled Nuts"!!!
    • Sea Shell
    • By Sea Shell 19th Sep 19, 6:43 AM
    • 2,568 Posts
    • 4,625 Thanks
    Sea Shell
    Going back to my original question....

    Does any one know if you can use form P55 to reclaim tax in subsequent years, after the initial years withdrawal?

    Many thanks
    " That pound I saved yesterday, is a pound I don't have to earn tomorrow " JOB DONE!!
    This should now read "It's time to start digging up those Squirrelled Nuts"!!!
    • Sea Shell
    • By Sea Shell 19th Sep 19, 6:49 AM
    • 2,568 Posts
    • 4,625 Thanks
    Sea Shell
    Pension income is taxed under PAYE as earned income. If your providee had a P45 for the current tax year from your previous pension provider, or if they already have your tax code on file, then they will apply that tax code. If not, then HMRC require them to tax your income using the temporary rate until they issue them with a correct tax code.
    The temporary (or emergency) rate for the 2019/20 tax year is 1250L (S1250L in Scotland).
    The temporary rate works on what is known as a ‘month 1’ basis. This means that the calculation used will have only allocated 1/12th of your tax free personal allowance to your lump sum. They are required by HMRC to use this calculation even if the lumpsum is the only payment made in that tax year.

    If you’ve overpaid tax, your provider is not allowed to make ad hoc tax refunds.
    HMRC may decide to tell them to amend the tax on your future income payments to correct your tax position. Alternatively, HMRC could review your tax paid at the end of the tax year and issue a tax calculation to adjust your position. In some circumstances you may be able to make an in year claim to get back any overpaid tax.

    If the lump sum payment:
    •used up your pension pot and you have no other income, complete form P50Z
    •used up your pension pot and you have other taxable income, complete form P53Z
    •didn’t use up your pension pot and you’re not taking any more payments from the plan in this tax year, complete form P55
    •didn’t use up your pension pot, then any further income payments will carry on being taxed under the current tax code unless HMRC issues your provider with a revised tax code.
    Originally posted by midlandsimon
    My bold....basically can this be done annually?
    " That pound I saved yesterday, is a pound I don't have to earn tomorrow " JOB DONE!!
    This should now read "It's time to start digging up those Squirrelled Nuts"!!!
    • p00hsticks
    • By p00hsticks 19th Sep 19, 12:36 PM
    • 7,147 Posts
    • 7,898 Thanks
    p00hsticks
    Going back to my original question....

    Does any one know if you can use form P55 to reclaim tax in subsequent years, after the initial years withdrawal?

    Many thanks
    Originally posted by Sea Shell
    Not answering your question directly, but in my experience you don't have to reclaim tax in subsequent years, assuming you've not got income elsewhere.

    Once you've made the intial withdrawal and HMRC become aware then they'll allocate your tax allowance to the SIPP provider and - as long as you say that you only intend to make the one withdrawal per year - the following withdrawals will have your tax code aplpied and so there'll be no tax deducted.

    At least thats what I've found has happened in my case (with AVIVA).
    • molerat
    • By molerat 19th Sep 19, 12:57 PM
    • 21,369 Posts
    • 15,629 Thanks
    molerat
    By what mechanism would they deduct no tax on a £12500 withdrawal in month 1, is there a special system for one off annual payments ? I would have thought the only way to do it would be in M12. We are working on taking MrsM's £3600 next year in M3 for that reason.
    Last edited by molerat; 19-09-2019 at 1:09 PM.
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