Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@.

Search
  • FIRST POST
    • newhit
    • By newhit 8th Mar 18, 10:08 AM
    • 28Posts
    • 0Thanks
    newhit
    Drawdown and pension tax?
    • #1
    • 8th Mar 18, 10:08 AM
    Drawdown and pension tax? 8th Mar 18 at 10:08 AM
    I asked a question the other day about 600,000 pot along with my pension income (state + works) of 12980/y. If I use a drawdown scenario can I take out an allowable income of about 2400/m from the 600k, without incurring further tax on my total income (drawdown + pension)?
    I realise that I must be aware of growth rates, fund longevity and age time limits but am I missing anything tax wise?
    Last edited by newhit; 08-03-2018 at 10:15 AM.
Page 1
    • dunstonh
    • By dunstonh 8th Mar 18, 10:18 AM
    • 92,580 Posts
    • 59,889 Thanks
    dunstonh
    • #2
    • 8th Mar 18, 10:18 AM
    • #2
    • 8th Mar 18, 10:18 AM
    If I use a drawdown scenario can I take out an allowable income of about 2400/m from the 600k, without incurring further tax on my total income (drawdown + pension)?
    Yes if you use phased drawdown with the 25% TFC providing the income. If you use regular drawdown then you would be taxed on 75%.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • TcpnT
    • By TcpnT 8th Mar 18, 10:37 AM
    • 117 Posts
    • 61 Thanks
    TcpnT
    • #3
    • 8th Mar 18, 10:37 AM
    • #3
    • 8th Mar 18, 10:37 AM
    Yes if you use phased drawdown with the 25% TFC providing the income. If you use regular drawdown then you would be taxed on 75%.
    Dunstonh - can you elaborate a little here. As I see it you would have to crystallise 9600/month in order to take in orders to take a 25% (2400) tax free income per month. However this strategy would only work for 5 years or so until the whole pot was crystallised (ignoring growth for simplicity). After this
    all future drawdown income would be subject to your marginal income tax rate. Is this what you meant or am I misunderstanding your suggested strategy?
    • dunstonh
    • By dunstonh 8th Mar 18, 10:45 AM
    • 92,580 Posts
    • 59,889 Thanks
    dunstonh
    • #4
    • 8th Mar 18, 10:45 AM
    • #4
    • 8th Mar 18, 10:45 AM
    Yes, the ability to use the 25% would run out with such a draw rate once the fund is fully crystallised. I noted the comment about time limits in the first post. So, I was replying on the basis that it was understood that it was only possible for a period.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • newhit
    • By newhit 8th Mar 18, 11:40 AM
    • 28 Posts
    • 0 Thanks
    newhit
    • #5
    • 8th Mar 18, 11:40 AM
    • #5
    • 8th Mar 18, 11:40 AM
    Thanx dunstonh. The time limit I have in my scenario is 82 years old (I'm 65 just). Are you saying that this 82 limit is too high?
    Last edited by newhit; 08-03-2018 at 11:43 AM.
    • dunstonh
    • By dunstonh 8th Mar 18, 12:11 PM
    • 92,580 Posts
    • 59,889 Thanks
    dunstonh
    • #6
    • 8th Mar 18, 12:11 PM
    • #6
    • 8th Mar 18, 12:11 PM
    Thanx dunstonh. The time limit I have in my scenario is 82 years old (I'm 65 just). Are you saying that this 82 limit is too high?
    Originally posted by newhit
    I appear to have misinterpreted what you meant be timing.

    As TcpnT says, being able to phase the drawdown and use the tax free cash as income will only be possible until the pension is fully crystallised. You would need to crystallise 9600 per month to draw 2400 tax free. If we ignore growth 600,000 divided by 9600 is 62.5 months. So, in 62 months or thereabouts you will no longer have any more 25% tax free cash available. After that, what you draw would be taxable.

    So, you would be tax free until around age 71. After that, tax is inevitable.

    Nearly half of those retiring today at 65 will get into their 90s. Your draw rate is not the issue. Just the tax side.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • newhit
    • By newhit 9th Mar 18, 9:28 AM
    • 28 Posts
    • 0 Thanks
    newhit
    • #7
    • 9th Mar 18, 9:28 AM
    • #7
    • 9th Mar 18, 9:28 AM
    Thanx dunstonh / TcpnT.


    "Crystallise"...........sounds like what's going on in my head. The missus will be watching closely for any noticeable cracks or splits in said area! I keep wondering why she has started slapping me on the back every few minutes?
    • newhit
    • By newhit 11th Mar 18, 6:45 AM
    • 28 Posts
    • 0 Thanks
    newhit
    • #8
    • 11th Mar 18, 6:45 AM
    • #8
    • 11th Mar 18, 6:45 AM
    Sorry, back again..........


    This "crystallisation" seems important. Am I to assume that the 600k will run out in about 5 years with 2400/m, whatever plan I take? Can I not get some growth rates in the equation, even though rates are shxxxe atm? Again, sorry for the naivety of my reasoning. I do have an IFA appointment but I need to sit down in his office with some idea in my head.
    • mgdavid
    • By mgdavid 11th Mar 18, 11:31 AM
    • 5,594 Posts
    • 4,916 Thanks
    mgdavid
    • #9
    • 11th Mar 18, 11:31 AM
    • #9
    • 11th Mar 18, 11:31 AM
    Sorry, back again..........


    This "crystallisation" seems important. Am I to assume that the 600k will run out in about 5 years with 2400/m, whatever plan I take? Can I not get some growth rates in the equation, even though rates are shxxxe atm? Again, sorry for the naivety of my reasoning. I do have an IFA appointment but I need to sit down in his office with some idea in my head.
    Originally posted by newhit
    What exactly is your objective in all this?
    Is it to minimise tax paid during your lifetime and push it all into the post-death scenario? Given the uncertainty of future tax rates it may be better to pay some tax at 20% year-by-year while you can.
    The questions that get the best answers are the questions that give most detail....
    • newhit
    • By newhit 11th Mar 18, 12:44 PM
    • 28 Posts
    • 0 Thanks
    newhit
    Thanx for the reply "mgdavid".

    We are mrge and loan free atm and my 12980/y keeps the bills paid. My wife just needs to know that she has a regular 2k+/m income, whatever happens to me, so that, if she loses that 12980 buffer she wont be struggling in her own future (salary, work, costs). She is 60 atm and has 66 as her retirement age so she just wants to get on with everything day to day, and month to month, etc.
    • TcpnT
    • By TcpnT 11th Mar 18, 1:13 PM
    • 117 Posts
    • 61 Thanks
    TcpnT
    This "crystallisation" seems important. Am I to assume that the 600k will run out in about 5 years with 2400/m, whatever plan I take? Can I not get some growth rates in the equation, even though rates are shxxxe atm? Again, sorry for the naivety of my reasoning. I do have an IFA appointment but I need to sit down in his office with some idea in my head.
    Without wanting to sound rude your level of understanding of pensions and tax seems to be minimal. I really think you need to sit down with an IFA to gain at least a basic understanding.

    But to answer your question - No the 600K will not run out after 5 years. You will have withdrawn only 144K in that time so, ignoring investment growth or loss, you will still have 456K in you SIPP.

    Your original question was about how much you could withdraw without incurring income tax - and the answer was that you could take your required income for 5 years without paying any income tax. After that any income over your personal allowance will be taxed.

    If you want more detailed answers you need to state your objectives more clearly.
    • Dazed and confused
    • By Dazed and confused 11th Mar 18, 2:08 PM
    • 2,557 Posts
    • 1,226 Thanks
    Dazed and confused
    As the op's first post stated,

    I asked a question the other day about 600,000 pot along with my pension income (state + works) of 12980/y.

    then surely he cannot take any taxable income without having to pay more tax. The only thing they could take without having extra tax to pay would be the 25% TFLS (or whatever option applies to this element of the pension)
    • newhit
    • By newhit 11th Mar 18, 3:07 PM
    • 28 Posts
    • 0 Thanks
    newhit
    Again, sorry for the lack of basic knowledge but, as above, we're not after too much, just a reasonable future/retirement. If I'm not being clear enough I will gladly wait until my IFA appointment.


    Many thanx for the replies.
    • dunstonh
    • By dunstonh 11th Mar 18, 4:07 PM
    • 92,580 Posts
    • 59,889 Thanks
    dunstonh
    The problem stems for you initially asking how much you can get out a year tax free. That may be the wrong question for your scenario.

    Your pension is 600k. So, if you have no requirement for an immediate lump sum, you can draw the 25% tax-free with each withdrawal. So, if you drew 2500 per month, 25% of each withdrawal would be tax free and the other 75% would be taxable.

    That is one method. The other, which your thread developed onto was taking none of the 75% but leaving it invested and only drawing the tax free amount. That is actually an unusual method unless you have a very low income requirement. That would require you taking 9600 per month on paper. However, only the 25% is paid to you. The other 75% stays in the pension. That 9600 (and any subsequent amounts each month) have already had their 25% paid. So, you can never get another 25% tax free against that segment.

    So, your uncrystallised 600,000 pot is going down by 9600 per month. 2400 is being paid to you tax free with 7200 going into your crystallised pension fund and remaining invested. You can access that crystallised fund at any time in the future but it will be taxed on the full amount above your personal allowance. Behind the scenes, your pension is segmented into crystallised and uncrystallised pots under the one account number. The money lost its just down to tax. That is one of the areas the IFA will help you.

    Your fund can sustain 2400 using reasonable assumptions and a reasonable level of investment risk. So, running out is not the issue. However, tax is going to come into play whatever way you do it.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • newhit
    • By newhit 12th Mar 18, 7:20 AM
    • 28 Posts
    • 0 Thanks
    newhit
    Many thanx "dunstonh".


    We have always used an accountant for most of our working life (top geezer), except when I was in a paid salary occupation. He handled all our finances and we were allowed get on with keeping ourselves above water with our business. I know, seems unlikely with my income/tax knowledge but, I can at least sit down with my IFA keep him interested for a couple of minutes (seconds?) before he gives up.


    Once again, many thanx for the perseverance and expert replies of you guys that took the trouble to explain the basics of what we are up against, and what we can reasonably budget for.
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

4Posts Today

4,001Users online

Martin's Twitter
  • It's the start of mini MSE's half term. In order to be the best daddy possible, Im stopping work and going off line? https://t.co/kwjvtd75YU

  • RT @shellsince1982: @MartinSLewis thanx to your email I have just saved myself £222 by taking a SIM only deal for £7.50 a month and keeping?

  • Today's Friday twitter poll: An important question, building on yesterday's important discussions: Which is the best bit of the pizza...

  • Follow Martin