Understanding how to draw down tax free out of pension

[LeoSayer]

98elise said:

It's sensible to choose lower risk as you move towards retirement age.

I agree in principle but that really depends on your drawdown plan.

Why de-risk a slice of your pot that you won't drawn from for another 10 years?

[tertius]

mikeiow said:

The benefit of crystallising that chunk is that you are helping guard against hitting the LTA.

Happy to be corrected but I don’t think this bit is quite right. Or possibly I am misunderstanding your point!

As I understand it each time you draw down from a pension you use up a percentage of your Lifetime Allowance.

To take a simple example if the LTA were £1,000,000 and you drew down £100,000, you would use up 10% of your allowance, leaving 90%

If the next time you drawdown the LTA has been increased to £1.1M you will only have 90% of £1.1M remaining (now £990K).

[Stay in Bed Instead]

tertius said:

Happy to be corrected but I don’t think this bit is quite right. Or possibly I am misunderstanding your point!

As I understand it each time you draw down from a pension you use up a percentage of your Lifetime Allowance.

To take a simple example if the LTA were £1,000,000 and you drew down £100,000, you would use up 10% of your allowance, leaving 90%

If the next time you drawdown the LTA has been increased to £1.1M you will only have 90% of £1.1M remaining (now £990K).

This is correct, although crystallisation is a better term than draw down. The latter tends to refer to the actual receipt of pension.

[98elise]

tertius said:

mikeiow said:

The benefit of crystallising that chunk is that you are helping guard against hitting the LTA.

Happy to be corrected but I don’t think this bit is quite right. Or possibly I am misunderstanding your point!

As I understand it each time you draw down from a pension you use up a percentage of your Lifetime Allowance.

To take a simple example if the LTA were £1,000,000 and you drew down £100,000, you would use up 10% of your allowance, leaving 90%

If the next time you drawdown the LTA has been increased to £1.1M you will only have 90% of £1.1M remaining (now £990K).

Thanks, I wasn't aware of that. My assumption was that the full LTA applied so the smaller pot (after crystalisation) would have a relatively bigger (%) allowance to grow into.

What's the different affect on LTA if you took the full 25% tax free lump sum at 55, or an equivalent amount cash but only 25% of that tax free?

This is way more difficult than it should be!

Edited by 98elise on Saturday 1st August 10:40

[Stay in Bed Instead]

98elise said:

Thanks, I wasn't aware of that. My assumption was that the full LTA applied so the smaller pot (after crystalisation) would have a relatively bigger (%) allowance to grow into.

What's the different affect on LTA if you took the full 25% tax free lump sum at 55, or an equivalent amount cash but only 25% of that tax free?

This is way more difficult than it should be!

Edited by 98elise on Saturday 1st August 10:40

You crystallise £x. You can receive 25% of £x as a tax free lump sum (Pension Commencement Lump Sum).

£x is tested against your LTA applicable at the time to create a percentage used.

That percentage used is then tested against your remaining LTA percentage unused.

So keeping things simple (assuming no LTA protection):

1st crystallisation of £400,000. LTA £1m. The crystallisation is 40% of the maximum LTA, leaving 60% unused.

2nd crystallisation of £300,000. LTA now £1.2M. The crystallisation is 25% of the maximum LTA. You have 60% remaining so 60% - 25% leaves 35% unused.

The administrator of the pension arrangement maintains details of what funds are crystallised and what are uncrystallised.

It can get complicated where you have more than one pension arrangement, as declaring the percentage used in one arrangement to the other arrangement is a legal requirement but there is no central database or anything to ensure people actually do!

[98elise]

Stay in Bed Instead said:

98elise said:

Thanks, I wasn't aware of that. My assumption was that the full LTA applied so the smaller pot (after crystalisation) would have a relatively bigger (%) allowance to grow into.

What's the different affect on LTA if you took the full 25% tax free lump sum at 55, or an equivalent amount cash but only 25% of that tax free?

This is way more difficult than it should be!

Edited by 98elise on Saturday 1st August 10:40

You crystallise £x. You can receive 25% of £x as a tax free lump sum (Pension Commencement Lump Sum).

£x is tested against your LTA applicable at the time to create a percentage used.

That percentage used is then tested against your remaining LTA percentage unused.

So keeping things simple (assuming no LTA protection):

1st crystallisation of £400,000. LTA £1m. The crystallisation is 40% of the maximum LTA, leaving 60% unused.

2nd crystallisation of £300,000. LTA now £1.2M. The crystallisation is 25% of the maximum LTA. You have 60% remaining so 60% - 25% leaves 35% unused.

The administrator of the pension arrangement maintains details of what funds are crystallised and what are uncrystallised.

It can get complicated where you have more than one pension arrangement, as declaring the percentage used in one arrangement to the other arrangement is a legal requirement but there is no central database or anything to ensure people actually do!

Thanks, that makes it clearer.

Fortunately I've consolidated all my cash pensions into a single SIPP, and only have one small DB pension from my military service.

[foiled]

If you crystallise a pension but leave it invested, does any growth on that pot become subject to capital gains tax?

[Stay in Bed Instead]

foiled said:

If you crystallise a pension but leave it invested, does any growth on that pot become subject to capital gains tax?

Nope.

Just assessed for Income Tax as you draw down as pension.

[mikeiow]

tertius said:

mikeiow said:

The benefit of crystallising that chunk is that you are helping guard against hitting the LTA.

Happy to be corrected but I don’t think this bit is quite right. Or possibly I am misunderstanding your point!

As I understand it each time you draw down from a pension you use up a percentage of your Lifetime Allowance.

To take a simple example if the LTA were £1,000,000 and you drew down £100,000, you would use up 10% of your allowance, leaving 90%

If the next time you drawdown the LTA has been increased to £1.1M you will only have 90% of £1.1M remaining (now £990K).

Perhaps misunderstanding my point: the rest are correct, as LTA increases YoY your crystallised amount was a % of that, so in general, don't crystallise if you are a way off the LTA and don't have a specific reason to.
...but my point was that if you *are* nudging the LTA *today*, you might (not 100% - not if markets fall!) be better crystallising BEFORE the pot grows about the LTA.

Stay in Bed Instead said:

foiled said:

If you crystallise a pension but leave it invested, does any growth on that pot become subject to capital gains tax?

Nope.

Just assessed for Income Tax as you draw down as pension.

Correct.....
.....BUT don't forget there is a *second* LTA test at age 75 - any growth in the crystallised pot is measured against that (along with any other non-crystallised amounts).
I suspect that one will be the one that may trip a few folk up if markets perform reasonably well.....

Edited by mikeiow on Saturday 1st August 21:08

[foiled]

Is it possible to defer the tax free amount? Or is 25% of the crystallised funds always tax free?

[Stay in Bed Instead]

foiled said:

Is it possible to defer the tax free amount? Or is 25% of the crystallised funds always tax free?

There is no age limit to draw the tax free cash. But, if you haven't and then die after age 75 it becomes potentially taxable on the recipient(s) of the fund.

[T6 vanman]

LeoSayer said:

williaa68 said:

As well as a SIPP, I have a small DB pension with some AVCs attached. The AVCs would be less than 25% of the pension value, and less than 25% on the 20* pension basis too, which I think is relevant for LTA purposes. I dont particularly want to draw the pension early at 55 (not that far away) as the discount is a bit punitive, and it doesn't make much sense given the pension isn't that large anyway - about £15k a year at 65. However, I'd love to get my hands on the tax free lump sum sooner rather than later. Is there a way I can take the AVCs as part of my tax free lump sum but not touch the pension itself. I would ask the administrator (towers watson) but they aren't particularly helpful and so I'd like to ask the question armed with the answer if possible! Thanks in advance.

The AVCs should be a pot that you can transfer to your SIPP without touching or affecting the DB part.

Some DB pensions contain a facility to take a tax free lump sum from a linked pot (eg. the AVC) without reducing the DB pension amount.

I think the questions to ask TW are:
- How do I transfer my AVCs to my SIPP?
- Do I lose any pension benefits by transferring the AVC to my SIPP?

Hi Leo …. Similar situation, Planning for early 2022
DB held by company A
AVC held by separate company B
AVC = 22% of pension pot.
I don't want to touch the DB pension …. apart from wanting to start drawing the pension as per the statement claiming I'll get £&$ per month,
I want to withdraw all the AVC and spend on house, car, kid's etc (save a bit)but not put into another financial "package" like a SIPP …. I (maybe wrongly) assumed that I just write to company B and request withdraw of AVC into my bank account to spend spend spend until my knob falls off …. Can I just ask for a big cheque??

[LeoSayer]

T6 vanman said:

Hi Leo …. Similar situation, Planning for early 2022
DB held by company A
AVC held by separate company B
AVC = 22% of pension pot.
I don't want to touch the DB pension …. apart from wanting to start drawing the pension as per the statement claiming I'll get £&$ per month,
I want to withdraw all the AVC and spend on house, car, kid's etc (save a bit)but not put into another financial "package" like a SIPP …. I (maybe wrongly) assumed that I just write to company B and request withdraw of AVC into my bank account to spend spend spend until my knob falls off …. Can I just ask for a big cheque??

AVC administrators may not have the facility to drawdown - you'll need to ask them. As before, confirm you won't lose any benefits.

If they don't do drawdowns hen you'll need to transfer the pot to a provider that does.

You can then take it all in one lump but just remember that income tax is payable on whatever you drawdown.

[DSLiverpool]

Assuming Rishi changes none of the current rules. I drained the lot assuming he would.

[T6 vanman]

LeoSayer said:

AVC administrators may not have the facility to drawdown - you'll need to ask them. As before, confirm you won't lose any benefits.

If they don't do drawdowns hen you'll need to transfer the pot to a provider that does.

You can then take it all in one lump but just remember that income tax is payable on whatever you drawdown.

Thanks for replying …. If I'm planning to use the AVC 'pot' as my PCLS then this is income tax free (as it equates 22% of my total pot) … or am I not understanding the rules correctly

I do plan to get proper (not man on motoring titernet forum) advice but It's appreciated to understand what I can/can't do before hand

[nickfrog]

I thought I'll revive this thread as I know some have found it useful.

Having maxed out on pension tax relief and ISA allowances we still have the proceed of an asset disposal to invest.

If we stop working entirely and have zero income above our tax free pension draw down, which looks extremely tempting, can the interests on non-ISA investments count towards our combined £25k or so income allowance so that we don't pay income tax or am I being totally naïve?

If so, would I need to set up "income" type funds rather than accumulative?

[Mr Pointy]

nickfrog said:

I thought I'll revive this thread as I know some have found it useful.

Having maxed out on pension tax relief and ISA allowances we still have the proceed of an asset disposal to invest.

If we stop working entirely and have zero income above our tax free pension draw down, which looks extremely tempting, can the interests on non-ISA investments count towards our combined £25k or so income allowance so that we don't pay income tax or am I being totally naïve?

If so, would I need to set up "income" type funds rather than accumulative?

If you have funds in a GIA (General Investment Account) then realised gains are subject to CGT not income tax, but you would get the CGT allowance of £12,300 (currently) a year so you could release £24,600 a year. If you can generate other income like share dividends or interets bearing bank accounts then these can be accounted for using your personal tax allowance. This is why I love ISAs - no tax issues.

Talk to Nik at IM - see the stickies.

[nickfrog]

Mr Pointy said:

If you have funds in a GIA (General Investment Account) then realised gains are subject to CGT not income tax, but you would get the CGT allowance of £12,300 (currently) a year so you could release £24,600 a year. If you can generate other income like share dividends or interest bearing bank accounts then these can be accounted for using your personal tax allowance. This is why I love ISAs - no tax issues.

Thanks for that, it makes sense.

Sadly we will be using up our combined CGT allowance in 21/22 on the asset disposal as we couldn't get the sale completed last month.

So it looks like we will be investing £250,000 in non ISA stuff with Vanguard.

For simplicity let's assume zero dividend and accumulative funds, we won't pay any CGT on our first £24,600 worth of capital growth (almost 10%, that would be nice) although we will only be able to "convert" £40k worth into ISA using our combined 22/23 ISA allowances.

I guess we need to realise the entire £250K+growth in 12 months time and re-invest the lot into more non-ISA stuff (minus the £40k ISA) and rinse and repeat every year until depletion of the non-ISA investments.

Does that sound right ? (anyone?).

[Mr Pointy]

nickfrog said:

Thanks for that, it makes sense.

Sadly we will be using up our combined CGT allowance in 21/22 on the asset disposal as we couldn't get the sale completed last month.

So it looks like we will be investing £250,000 in non ISA stuff with Vanguard.

For simplicity let's assume zero dividend and accumulative funds, we won't pay any CGT on our first £24,600 worth of capital growth (almost 10%, that would be nice) although we will only be able to "convert" £40k worth into ISA using our combined 22/23 ISA allowances.

I guess we need to realise the entire £250K+growth in 12 months time and re-invest the lot into more non-ISA stuff (minus the £40k ISA) and rinse and repeat every year until depletion of the non-ISA investments.

Does that sound right ? (anyone?).

Well you only pay CGT when you realise the funds of course. As I understand it if on April 6th 2022 you took out £40,000 then you would have CGT liability on 40,000/250,000 ths or about 16% of the gain (note these are very rough numbers to illustrate the point, ignoring gains). This could easily be under your CGT allowance for the year. You'd leave the £210k invested to do the same next year, it just takes a long time at only £40k a time.

Note also that a GIA can have realised gains throughout the year from internal transactions so you might need to judge how much gain margin you have available to you or risk having to pay CGT.

Of course I'd say if you want an accurate opinion of how you might proceed then have a chat with Nik at IM but then some fkwit will pipe up about me getting commission.