Can I do this?
Discussion
I have a decent bonus coming but of course if that goes through payroll I'll lose a big chunk of tax & NI.
I'm over 55. If I salary-sacrifice a chunk of it into my pension, tax free, calculating the amount so as to remain under the annual cap, can I draw that back out again as part of my tax free drawdown allowance, even if I'm not intending to take any more pension in any form currently? I'm sure it's not that simple but may as well ask! I'll check with my pension advisor anyway but the thought just came to mind this evening so I'm curious to know.
Thanks.
I'm over 55. If I salary-sacrifice a chunk of it into my pension, tax free, calculating the amount so as to remain under the annual cap, can I draw that back out again as part of my tax free drawdown allowance, even if I'm not intending to take any more pension in any form currently? I'm sure it's not that simple but may as well ask! I'll check with my pension advisor anyway but the thought just came to mind this evening so I'm curious to know.
Thanks.
Can't see any reason why not. Then again, I'm not a FA/IFA ;-)
Essentially, it looks like 2 questions to me:
1: are you allowed to get it in the pension?
Yes (assuming under the limits as you describe).
2: can you later take up to 25% TFLS now you are 55?
Of course!
The two aren't really linked.
Unless I'm missing something obvious (see my first line!)
Maybe don't do it all the same day ;-)
Essentially, it looks like 2 questions to me:
1: are you allowed to get it in the pension?
Yes (assuming under the limits as you describe).
2: can you later take up to 25% TFLS now you are 55?
Of course!
The two aren't really linked.
Unless I'm missing something obvious (see my first line!)
Maybe don't do it all the same day ;-)
Drumroll said:
I'd look at that idea again as you may not end up saving as much as you think in the long term.
Why not? Tax free on the way in......¼ of it tax-free on the way out?I'm aware that it means taking it out of my pension, where it could grow if I leave it. I'm not even decided on this course of action but just pondering whether it is an option or not.
I've confirmed that I can salary-sacrifice it into my pension, yes, subject to the government's annual cap.
I could put (some of) it in the pension without exceeding the cap, and clearly that has long-term benefits; I'm in no way blind to that. But it's an abnormal bonus, a one off, it wouldn't otherwise end up in my pension, and if I want to access it directly I'll lose 40%+ immediately (worse effectively due to the loss of personal allowance >£100k). I'm just contemplating whether this is a means of accessing a bit of cash whilst legally avoiding tax?
I've confirmed that I can salary-sacrifice it into my pension, yes, subject to the government's annual cap.
I could put (some of) it in the pension without exceeding the cap, and clearly that has long-term benefits; I'm in no way blind to that. But it's an abnormal bonus, a one off, it wouldn't otherwise end up in my pension, and if I want to access it directly I'll lose 40%+ immediately (worse effectively due to the loss of personal allowance >£100k). I'm just contemplating whether this is a means of accessing a bit of cash whilst legally avoiding tax?
Edited by CAPP0 on Wednesday 19th February 22:24
I thought you could only take out the 25% once at the time of drawdown. Yes you can defer and take some in later years but only the total of the 25% at time of first drawdown.
So you hit 55 with a 500K pot, you *could* take 125k tax free but choose to just take £25k that year. You can take out another £25k a year tax free for 4 more years until you hit the £125k.
Even if you pay in another £40k a year whilst working, the £125k tax free is your limit as it was set when you first entered drawdown.
At least thats my understanding of it.
So you hit 55 with a 500K pot, you *could* take 125k tax free but choose to just take £25k that year. You can take out another £25k a year tax free for 4 more years until you hit the £125k.
Even if you pay in another £40k a year whilst working, the £125k tax free is your limit as it was set when you first entered drawdown.
At least thats my understanding of it.
bogie said:
I thought you could only take out the 25% once at the time of drawdown. Yes you can defer and take some in later years but only the total of the 25% at time of first drawdown.
So you hit 55 with a 500K pot, you *could* take 125k tax free but choose to just take £25k that year. You can take out another £25k a year tax free for 4 more years until you hit the £125k.
Even if you pay in another £40k a year whilst working, the £125k tax free is your limit as it was set when you first entered drawdown.
At least thats my understanding of it.
That's interesting on all counts, thanks, and perhaps answers my question; I didn't know whether at my age I could just request, say, a £30k one off drawdown and then go back to my pension in a few years' time, albeit that £30k counts towards your 25%. But if my pot grows between now and whatever I hang my keyboard up then overall I'd effectively get less than 25% tax free overall?So you hit 55 with a 500K pot, you *could* take 125k tax free but choose to just take £25k that year. You can take out another £25k a year tax free for 4 more years until you hit the £125k.
Even if you pay in another £40k a year whilst working, the £125k tax free is your limit as it was set when you first entered drawdown.
At least thats my understanding of it.
Maybe I’m mis-reading those last messages...but no, I think bogie has it slightly off.
You can just take out up to 25% from the age of 55 without touching any of the rest.
The other 75% would them technically move to drawdown, but provided you do not touch a penny of that part, you can continue to contribute to the pension as a whole as normal.
Be aware: as soon as you touch that, you trigger the MPAA, and cannot then put more than £4K a year in.....
You can repeat that as many times as you like, up to the amount in your pot (including growth each time)
For example: you start with 500k pot.
You “crystallise” 100k, which gives you 25k as a tax free lump sum (TFLS).
75k ‘moves’ to drawdown within the pension provider.
400k remained “uncrystallised”.
Say the pot grows 50% over a few years before you decide to take some more.
The 400k is now 600k.
You could crystallise any of that.
Say you chose all of it: taking £150k TFLS & leaving 450k in ‘drawdown’.
At that point, any further “withdrawals” on the pension would be taxable income, and you would trigger the MPAA.
How your pension company deals with the piece now in drawdown may vary: I’ve done this with some of mine, & Aviva leave it invested in exactly the same funds I was in before, but marked in the app as “in drawdown”.
You can just take out up to 25% from the age of 55 without touching any of the rest.
The other 75% would them technically move to drawdown, but provided you do not touch a penny of that part, you can continue to contribute to the pension as a whole as normal.
Be aware: as soon as you touch that, you trigger the MPAA, and cannot then put more than £4K a year in.....
You can repeat that as many times as you like, up to the amount in your pot (including growth each time)
For example: you start with 500k pot.
You “crystallise” 100k, which gives you 25k as a tax free lump sum (TFLS).
75k ‘moves’ to drawdown within the pension provider.
400k remained “uncrystallised”.
Say the pot grows 50% over a few years before you decide to take some more.
The 400k is now 600k.
You could crystallise any of that.
Say you chose all of it: taking £150k TFLS & leaving 450k in ‘drawdown’.
At that point, any further “withdrawals” on the pension would be taxable income, and you would trigger the MPAA.
How your pension company deals with the piece now in drawdown may vary: I’ve done this with some of mine, & Aviva leave it invested in exactly the same funds I was in before, but marked in the app as “in drawdown”.
Edited by mikeiow on Wednesday 19th February 23:45
mikeiow said:
Be aware: as soon as you touch that, you trigger the MPAA, and cannot then put more than £4K a year in.....
Thanks - these are exactly the sort of pointers I was looking for. As per my OP, I'd ask my pensions people anyway but had the thought this evening and wanted to find out more, which I definitely have done now.
I believe you are referring to a phased drawdown.
In theory, you can crystallise your entire pension pot (say £500k) in one single hit to gain access to the tax free 25% (£125k). You can retain the 75% (£375k) in a drawdown account which can remain invested for growth, but withdrawals from this will be subjected to tax and trigger MPAA. These will trigger BCE events which will use up your Lifetime allowance.
Alternatively, you can take your tax free 25% over a number of years, let's say for 5 year and assume you want to access the tax free 25% (£25k) each year. You basically crystalise £100k over 5 years to achieve this.
No point re-inventing the wheel, but phased drawdown was recently discussed with good withdrawal examples and use case:
https://www.pistonheads.com/gassing/topic.asp?h=0&...
The use case is relevant to you as it highlights how phase drawdown could be used to access the tax free 25% and the (taxable) drawdown funds over many years. Also, the other benefits to phased drawdown are explained in the external link e.g. Drawdown funds remain invested for growth, uncrystalised pension could generate additional tax free 25% entitlement.
Hope this helps.
In theory, you can crystallise your entire pension pot (say £500k) in one single hit to gain access to the tax free 25% (£125k). You can retain the 75% (£375k) in a drawdown account which can remain invested for growth, but withdrawals from this will be subjected to tax and trigger MPAA. These will trigger BCE events which will use up your Lifetime allowance.
Alternatively, you can take your tax free 25% over a number of years, let's say for 5 year and assume you want to access the tax free 25% (£25k) each year. You basically crystalise £100k over 5 years to achieve this.
No point re-inventing the wheel, but phased drawdown was recently discussed with good withdrawal examples and use case:
https://www.pistonheads.com/gassing/topic.asp?h=0&...
The use case is relevant to you as it highlights how phase drawdown could be used to access the tax free 25% and the (taxable) drawdown funds over many years. Also, the other benefits to phased drawdown are explained in the external link e.g. Drawdown funds remain invested for growth, uncrystalised pension could generate additional tax free 25% entitlement.
Hope this helps.
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