Pension Drawdown - Minimising overall tax

[omniflow]

Hi,

I realise that this is really a topic for a retained financial adviser, but I like to go into these things with my own basic understanding.

I have a SIPP that is at the current lifetime limit and I am 55. I don't have a fulltime job, but a limited company of which I am a director and my wife is an employee has a sporadic income.

If I drawdown £66,666 per year, then by my calculations I pay £7,500 in income tax on that sum. £16,666 as a tax free 25%, £12,500 as my annual tax free allowance and then £37,500 taxed at 20%

From what I've read, NI is not payable on payments from a pension.

Is this the most tax efficient way to extract the money, or is there a better way? Or, are my assumptions / calculations above incorrect?

Thanks

[anonymous-user]

Don't forget the tax free lump sum.

That's either a massive bender tax free or around 4 years drawings at the rate you mention.

[98elise]

desolate said:

Don't forget the tax free lump sum.

That's either a massive bender tax free or around 4 years drawings at the rate you mention.

He's factored the 25% into the drawdown.

[NickCQ]

98elise said:

He's factored the 25% into the drawdown.

Yes but I assume your drawdowns use up the tax free amount before starting to be taxable.

[anonymous-user]

98elise said:

He's factored the 25% into the drawdown.

I was on my first coffee of the morning and I'd missed that.

[JulianPH]

omniflow said:

Hi,

I realise that this is really a topic for a retained financial adviser, but I like to go into these things with my own basic understanding.

I have a SIPP that is at the current lifetime limit and I am 55. I don't have a fulltime job, but a limited company of which I am a director and my wife is an employee has a sporadic income.

If I drawdown £66,666 per year, then by my calculations I pay £7,500 in income tax on that sum. £16,666 as a tax free 25%, £12,500 as my annual tax free allowance and then £37,500 taxed at 20%

From what I've read, NI is not payable on payments from a pension.

Is this the most tax efficient way to extract the money, or is there a better way? Or, are my assumptions / calculations above incorrect?

Thanks

Your figures are correct, but you need to be looking at exactly what you need/want from this money and factor this into your planning.

For example, if your aim is now to get everything out of your pension as quickly and tax efficiently as possible then you could take the 25% tax free lump sum straight away and still draw down £50,000 a year of which £12,500 would be tax free (within your personal allowance) and the balanced taxed a 20% - so a £7,500 tax bill.

So you are c. £250,000 up tax free on day one and are still paying the same £7,500 tax bill on the £50,000 a year withdrawals (assuming you have no other taxable income.

However, if you want to ensure this fund provides you with an income for life then you may be better to lower the drawings to a more sustainable level, or take the higher level and put the balance in an ISA.

Other consideration may need to be given to IHT planning, as the money in your pension is free from IHT.

So there are several things to be considered, but all of the options are quite simple when you have identified the best route for you now.

Give me a shout if you would like to discuss, or PM me if you want to keep some of this private.

Cheers!

PS Almost forgot, you are right, there is no NI on pension income.

[Brads67]

Is the 25% tax free withdrawal a one off, or a yearly allowance ?

[JulianPH]

Brads67 said:

Is the 25% tax free withdrawal a one off, or a yearly allowance ?

You are allowed to take 25% of the entire pension fund tax free. It makes no difference if you take it as a one off, or as part of your annual payments.

The only time this could actually make a difference is if you were to die before taking the full allowance.

[Brads67]

Gotcha, thanks.

Without dragging the thread offcourse, is this per fund ? or a total of an individuals pension pots combined.?
i.e If you had 4 funds, I get that you can still only take 25% but would it have to be from each one, or can you take a total sum from the largest pot ?

[JulianPH]

Brads67 said:

Gotcha, thanks.

Without dragging the thread offcourse, is this per fund ? or a total of an individuals pension pots combined.?
i.e If you had 4 funds, I get that you can still only take 25% but would it have to be from each one, or can you take a total sum from the largest pot ?

It is 25% of everything combined, or 25% of each individual scheme if you prefer.

They both amount to exactly the same thing!

Cheers

[omniflow]

Thanks for the replies.

Taking this one stage further.

Obviously once in drawdown, I can only add £4K / year to my pension. As it's reached the current lifetime allowance I don't see that as an issue.

However, I (or probably more accurately WE) do have the option of living off my pension drawdown, and then putting all of the surplus company earnings into my wife's pension which still has a lot of capacity. I would then not draw a salary from the company, but my wife could continue to do so.

Or is that a stupid idea?

[OddCat]

JulianPH said:

Brads67 said:

Gotcha, thanks.

Without dragging the thread offcourse, is this per fund ? or a total of an individuals pension pots combined.?
i.e If you had 4 funds, I get that you can still only take 25% but would it have to be from each one, or can you take a total sum from the largest pot ?

It is 25% of everything combined, or 25% of each individual scheme if you prefer.

They both amount to exactly the same thing!

Cheers

I think Brad means for example, if he has £50k with each of Standard Life, Scottish Widows and Aegon, plus £250k with L&G (total £400k) can he take all of the tax free cash(£100k) from L&G. The answer is no.

[Mr Pointy]

omniflow said:

Thanks for the replies.

Taking this one stage further.

Obviously once in drawdown, I can only add £4K / year to my pension. As it's reached the current lifetime allowance I don't see that as an issue.

However, I (or probably more accurately WE) do have the option of living off my pension drawdown, and then putting all of the surplus company earnings into my wife's pension which still has a lot of capacity. I would then not draw a salary from the company, but my wife could continue to do so.

Or is that a stupid idea?

I think that as your wife in an employee not a Director she can only make pension payments up to the value of her income & a £40k maximum. In essence, you'd have to pay her £40k a year with all the tax & NI implications. Maybe you'll have to restructure the comany. I'm not an accountant though.

[Brads67]

OddCat said:

I think Brad means for example, if he has £50k with each of Standard Life, Scottish Widows and Aegon, plus £250k with L&G (total £400k) can he take all of the tax free cash(£100k) from L&G. The answer is no.

That is what I was asking ( In my clueless way). Thanks for clearing that up.

[grahamm]

Mr Pointy said:

omniflow said:

Thanks for the replies.

Taking this one stage further.

Obviously once in drawdown, I can only add £4K / year to my pension. As it's reached the current lifetime allowance I don't see that as an issue.

However, I (or probably more accurately WE) do have the option of living off my pension drawdown, and then putting all of the surplus company earnings into my wife's pension which still has a lot of capacity. I would then not draw a salary from the company, but my wife could continue to do so.

Or is that a stupid idea?

I think that as your wife in an employee not a Director she can only make pension payments up to the value of her income & a £40k maximum. In essence, you'd have to pay her £40k a year with all the tax & NI implications. Maybe you'll have to restructure the comany. I'm not an accountant though.

I believe your company can pay £40,000 per year into an employees pension irrespective of salary, you could also use previous years unused allowances.

[Mr Pointy]

grahamm said:

Mr Pointy said:

omniflow said:

Thanks for the replies.

Taking this one stage further.

Obviously once in drawdown, I can only add £4K / year to my pension. As it's reached the current lifetime allowance I don't see that as an issue.

However, I (or probably more accurately WE) do have the option of living off my pension drawdown, and then putting all of the surplus company earnings into my wife's pension which still has a lot of capacity. I would then not draw a salary from the company, but my wife could continue to do so.

Or is that a stupid idea?

I think that as your wife in an employee not a Director she can only make pension payments up to the value of her income & a £40k maximum. In essence, you'd have to pay her £40k a year with all the tax & NI implications. Maybe you'll have to restructure the comany. I'm not an accountant though.

I believe your company can pay £40,000 per year into an employees pension irrespective of salary, you could also use previous years unused allowances.

Is that for any employee, not just a Director? I'm surprised, but then I'm not an accountant.