Drawdown and pension tax?

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newhit
newhit Posts: 34 Forumite
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edited 8 March 2018 at 11:15AM in Pensions, annuities & retirement planning
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?
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  • dunstonh
    dunstonh Posts: 116,379 Forumite
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    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). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • TcpnT
    TcpnT Posts: 277 Forumite
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    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
    dunstonh Posts: 116,379 Forumite
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    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). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • newhit
    newhit Posts: 34 Forumite
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    edited 8 March 2018 at 12:43PM
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    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?
  • dunstonh
    dunstonh Posts: 116,379 Forumite
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    newhit wrote: »
    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?

    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). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • newhit
    newhit Posts: 34 Forumite
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    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
    newhit Posts: 34 Forumite
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    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
    mgdavid Posts: 6,705 Forumite
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    newhit wrote: »
    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.

    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
    newhit Posts: 34 Forumite
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    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
    TcpnT Posts: 277 Forumite
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    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.
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