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swift1894

Retirement planning

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Just wondered if some chooses to “Drawdown” their pension but takes less than £11,850 (personal Allowance) per year, is that all tax free, because I know that if they choose an annuity, only 25% is a tax free lump sum and the monthly payment is taxable?

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53 minutes ago, swift1894 said:

Just wondered if some chooses to “Drawdown” their pension but takes less than £11,850 (personal Allowance) per year, is that all tax free, because I know that if they choose an annuity, only 25% is a tax free lump sum and the monthly payment is taxable?

That's what I imagine, any income over £11,850 is taxable. 

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3 minutes ago, Jennifer McM said:

That's what I imagine, any income over £11,850 is taxable. 

...until next month, when the tax-free allowance shoots up to £12,500. 

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10 minutes ago, Athy said:

...until next month, when the tax-free allowance shoots up to £12,500. 

 

Once you are over the threshold the state pension is reduced by the appropriate amount. The OP needs to take ALL income into account. 

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11 minutes ago, Machpoint005 said:

 

Once you are over the threshold the state pension is reduced by the appropriate amount. The OP needs to take ALL income into account. 

Yes, that's right. Income over £12,500 (from next month) is taxable, although I THINK there's a further allowance (£1,000?) for savings interest, and of course income from ISAs isn't taxed either.

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2 hours ago, swift1894 said:

Just wondered if some chooses to “Drawdown” their pension but takes less than £11,850 (personal Allowance) per year, is that all tax free, because I know that if they choose an annuity, only 25% is a tax free lump sum and the monthly payment is taxable?

 

You can take 25% tax free from drawdown, and the rest (over the personal allowance) is taxable in the ordinary way.

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2 minutes ago, David Mack said:

 

You can take 25% tax free from drawdown, and the rest (over the personal allowance) is taxable in the ordinary way.

If the drawdown amount puts you over the tax limit, think about (if your very quick) drawdown an amount now, and another amount after 5th April - splitting it over two tax years.

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3 hours ago, Jennifer McM said:

If the drawdown amount puts you over the tax limit, think about (if your very quick) drawdown an amount now, and another amount after 5th April - splitting it over two tax years.

Not wishing to state the obvious, but the more you take out now the less there is to grow (or shrink) for your future pension.

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1 minute ago, Chewbacka said:

Not wishing to state the obvious, but the more you take out now the less there is to grow (or shrink) for your future pension.

I'm sure the OP has thought about that :) 

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I think if your only income in a tax year is pension drawdown then £16,667 could be extracted tax free as of 6th April. £4,167 will be classed as the 25% tax free lump sum and the remainder will be classed as income and bring you to the personal allowance of £12,500.

 

JP

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17 minutes ago, Captain Pegg said:

I think if your only income in a tax year is pension drawdown then £16,667 could be extracted tax free as of 6th April. £4,167 will be classed as the 25% tax free lump sum and the remainder will be classed as income and bring you to the personal allowance of £12,500.

 

JP

 

You can take 25% of you pension pot tax free. This is once in lifetime thing

This may be in one lump sum  or any amount you wish

lets say you have £100k in a pension pot

For example You can take £25000 tax free in one hit

Or you may  take £2500 per year for 10 years  tax free 

 

 

 

 

 

 

 

 

 

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21 minutes ago, MartynG said:

 

You can take 25% of you pension pot tax free. This is once in lifetime thing

This may be in one lump sum  or any amount you wish

lets say you have £100k in a pension pot

For example You can take £25000 tax free in one hit

Or you may  take £2500 per year for 10 years  tax free 

 

 

 

 

 

 

 

 

 

I'm not clear as to whether you are disagreeing with me or adding to my comment.

 

However, I don't believe you can draw out 25% of your total fund tax free while leaving the remainder in the fund. You only get 25% tax free of the amount you withdraw at the time. And that isn't once in a lifetime since you can make more than one drawdown with 25% of the drawdown tax free. That means you can only have the full 25% of your total fund tax free in one go if you withdraw the entire fund as a lump sum (if you have a scheme that allows such) or buy an annuity with the remainder. Company pensions have an equivalent option.

 

JP

Edited by Captain Pegg

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10 minutes ago, Captain Pegg said:

However, I don't believe you can draw out 25% of your total fund tax free while leaving the remainder in the fund. 

You can if you wish.

But I would not suggest it is necessarily a good idea.

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42 minutes ago, Tonka said:

If your partner is not working they can give you part of their allowance

I think that's correct, £1000?

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By the way it would be wise to seek advice from a financial adviser rather than an internet forum.

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OK, 25% of your "pot" is tax free. As you take this 25% (can be in any amounts of cash) the other 75% goes into what is called a crystallised account. So take 1,000 tax free then 3,000 goes into this crystallised account. This is where you take your draw down from. You should always keep money in this crystallised account from which to take your draw down. It is more tax efficient.

 

Don't forget any state pension or any other income has to be taken into account for your personal allowance/tax free income.

 

As mentioned the more you leave in your fund the more it has the chance of growing. If you have 10,000 in your fund you can take 2,500 tax free. If you take only 1,000 tax free that leaves 5,000 in the tax free fund (as opposed to 7,500) which if the tax free fund grows by £500 in the next year then you will have 5,500 available to take the 25% tax free cash. The £500 earned is also available for you to take 25% of tax fee. If you take all the 25% in one go there is no more earnings on the account that are available for 25% tax free.

 

Do talk to Pensionwise about this and get their free advice.

Edited by DaveR

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12 minutes ago, MartynG said:

You can if you wish.

But I would not suggest it is necessarily a good idea.

OK. So the OP could withdraw more than he proposes tax free providing his scheme allows such and it isn't more than 25% of the overall pot. So my calculation only holds if he wants any future income to be normally taxed.

 

2 minutes ago, MartynG said:

By the way it would be wise to seek advice from a financial adviser rather than an internet forum.

Indeed

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On 08/03/2019 at 20:42, MartynG said:

By the way it would be wise to seek advice from a financial adviser rather than an internet forum.

But make sure he/she is an independent financial adviser.

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Independent financial advice isn't cheap (understatement!) so will probably only be worthwhile if the pension pot is large. PensionWise would probably help but will be limited and basic. 

 

My preferred method is "Do Your Own Research", very easy these days with the internet. Good places to start are Monevator, the help pages of Hargreaves Lansdowne and the pension pages of the Moneysavingexpert forums.

 

As (I think) others have said, there are two ways of taking the 25% tax-free.

 

One is to take it as a lump sum. This can always be re-invested into a stocks and shares ISA to get a tax-free income from it so it does not have to mean lower income in the future.

 

The other way is to take it a bit at a time by taking 25% of each drawdown amount tax-free. This might help...  https://www.gov.uk/tax-on-pension/tax-free. This method is known as Uncrystallised Fund Pension Lump Sum or UFPLS. 

 https://www.hl.co.uk/free-guides/ufpls

 

Other than the 25% tax-free amount/amounts the rest is taxable as it is drawn down. If total income, including pension drawdown, is under the personal allowance (https://www.moneysavingexpert.com/banking/tax-rates/) then all of the drawdown will be tax-free.

 

 

 

 

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On 08/03/2019 at 20:42, MartynG said:

By the way it would be wise to seek advice from a financial adviser rather than an internet forum.

Especialy a boating forum!!

I commuted a lump sum when I retired so my pension has been less each year than it might have been otherwise. Its swings and roundabouts.

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Just now, mrsmelly said:

Especialy a boating forum!!

True!

 

On the other hand, a boating forum probably has quite a high proportion of old codgers like me and you! Some of these might even be long-standing pension and ISA investors who know quite a lot about this stuff.

 

I have nothing against using IFAs in the right circumstances but I personally wouldn't use one, at least not for this stuff. No-one will have my interests at heart better than I do and all the information needed to DIY it is quite easy to find these days.

 

However, if I did have questions to ask I can think of better online places than Canalworld to ask them. The MSE pensions forum for starters.

 

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I'm not a professional advisor (I was in IT and last worked on a pensions system in 1978 when rules were very different). But I'm an old codger who's got to grips with UFPLS a bit in the last year or two.

 

If as it sounds the OP is talking about using UFPLS, i.e. taking one lump sum out of a pension each year, the rule is that 25% of that lump sum is tax free and the rest is taxed just as if it was normal income. So if for example your only income in the tax year ending April 2020 will be a lump sum of £16,000, you'll pay no tax because the £12,000 will be less than your tax allowance.

You don't have to take advice from Pensionwise or anyone else, you can like me just talk directly to your pension provider, but they will then ask you a lot of questions like Mrs Doyle along the lines of "Are you really really REALLY sure you don't need advice?" Also, not all pension schemes allow UFPLS, but a transfer into a scheme that does should be possible. And mine expects the lump sum to be a multiple of 1% of the total in the pension, so you may find you need to draw a little more or less than you wanted in a given year.

An application for UFPLS should be made in good time to avoid the winter rush, but note that the payment will be taxed on a month 1 basis, i.e. they may well deduct too much tax and you'll need to fill out a tax return and wait to get a refund. So the earlier in the tax year you draw the money, the longer you wait for a tax refund. Nov/Dec is probably a good time to do it.

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11 minutes ago, Lily Rose said:

True!

 

On the other hand, a boating forum probably has quite a high proportion of old codgers like me and you! Some of these might even be long-standing pension and ISA investors who know quite a lot about this stuff.

 

I have nothing against using IFAs in the right circumstances but I personally wouldn't use one, at least not for this stuff. No-one will have my interests at heart better than I do and all the information needed to DIY it is quite easy to find these days.

 

However, if I did have questions to ask I can think of better online places than Canalworld to ask them. The MSE pensions forum for starters.

 

I have found that the tax office/hmrc are always helpful. I have had an accountant for many years though as they have always saved me more than they cost me. Yes IFA bods are in it for one person and one person only!!

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