Pension Pot Question
Discussion
Hi All
Ok so my Father is close to retirement, I have a few questions I'm hoping to get some clarity on, before/if I need to speak to a financial advisor.
Pension Pot - £200k.
Understand you can take 25% Tax Free - £50k
Leaves £150k.
My question is based around taking as little hit as possible on the tax front. As I know if he took/released the remaining 150k he would get hit with a 30-40% tax bill.
My mum is retired basically, tinkers along using probably 2.5k of her 12.5k tax threshold leaving 10k that my father could utilise.
Bearing in mind the state pension is just under 9k. Plus utilising again the remaining amount against the tax threshold so £3.5k.
Could he use the 13.5k in total to release that amount each year from his £150k pot? meaning just over 11 years to take the pot to zero. Resulting in paying no tax at all?
Or does it not work like that...
Ok so my Father is close to retirement, I have a few questions I'm hoping to get some clarity on, before/if I need to speak to a financial advisor.
Pension Pot - £200k.
Understand you can take 25% Tax Free - £50k
Leaves £150k.
My question is based around taking as little hit as possible on the tax front. As I know if he took/released the remaining 150k he would get hit with a 30-40% tax bill.
My mum is retired basically, tinkers along using probably 2.5k of her 12.5k tax threshold leaving 10k that my father could utilise.
Bearing in mind the state pension is just under 9k. Plus utilising again the remaining amount against the tax threshold so £3.5k.
Could he use the 13.5k in total to release that amount each year from his £150k pot? meaning just over 11 years to take the pot to zero. Resulting in paying no tax at all?
Or does it not work like that...
Kingdom35 said:
...
My mum is retired basically, tinkers along using probably 2.5k of her 12.5k tax threshold leaving 10k that my father could utilise.
...
The personal allowance is, er, personal isn't it? Your father can't use any unused amount of your mother's allowance as far as I am aware.My mum is retired basically, tinkers along using probably 2.5k of her 12.5k tax threshold leaving 10k that my father could utilise.
...
I'm an IFA, so I can offer some guidance.
25% can be taken as a tax free lump sum and the remainder is taxable at your father's marginal rate of tax. The Married Couple's Allowance allows a slight increase to his Personal Allowance (which is £12,500 for 2019/20) but not enough to have any meaningful impact in my opinion.
Things to consider, does your father need to withdraw the 25% tax free cash in one hit? In can be spread out over many years. If he's only going to place it in a bank account, he should leave it in the pension fund which is a tax free growth environment and also free of IHT.
If your father dies before the age of 75, his nominated beneficiaries will receive 100% of the pension fund free of tax (subject to the Lifetime allowance of £1,055,000). If he does after the age of 75, his nominated beneficiaries will receive the pension fund free of IHT but they will be taxed at their marginal rate of tax (20% / 40% / 45%).
25% can be taken as a tax free lump sum and the remainder is taxable at your father's marginal rate of tax. The Married Couple's Allowance allows a slight increase to his Personal Allowance (which is £12,500 for 2019/20) but not enough to have any meaningful impact in my opinion.
Things to consider, does your father need to withdraw the 25% tax free cash in one hit? In can be spread out over many years. If he's only going to place it in a bank account, he should leave it in the pension fund which is a tax free growth environment and also free of IHT.
If your father dies before the age of 75, his nominated beneficiaries will receive 100% of the pension fund free of tax (subject to the Lifetime allowance of £1,055,000). If he does after the age of 75, his nominated beneficiaries will receive the pension fund free of IHT but they will be taxed at their marginal rate of tax (20% / 40% / 45%).
benbuhagiar said:
I'm an IFA, so I can offer some guidance.
25% can be taken as a tax free lump sum and the remainder is taxable at your father's marginal rate of tax. The Married Couple's Allowance allows a slight increase to his Personal Allowance (which is £12,500 for 2019/20) but not enough to have any meaningful impact in my opinion.
Things to consider, does your father need to withdraw the 25% tax free cash in one hit? In can be spread out over many years. If he's only going to place it in a bank account, he should leave it in the pension fund which is a tax free growth environment and also free of IHT.
If your father dies before the age of 75, his nominated beneficiaries will receive 100% of the pension fund free of tax (subject to the Lifetime allowance of £1,055,000). If he does after the age of 75, his nominated beneficiaries will receive the pension fund free of IHT but they will be taxed at their marginal rate of tax (20% / 40% / 45%).
Thank you....ive just seen as above its only going to be around £1.25k increase on his 12.5k allowance.25% can be taken as a tax free lump sum and the remainder is taxable at your father's marginal rate of tax. The Married Couple's Allowance allows a slight increase to his Personal Allowance (which is £12,500 for 2019/20) but not enough to have any meaningful impact in my opinion.
Things to consider, does your father need to withdraw the 25% tax free cash in one hit? In can be spread out over many years. If he's only going to place it in a bank account, he should leave it in the pension fund which is a tax free growth environment and also free of IHT.
If your father dies before the age of 75, his nominated beneficiaries will receive 100% of the pension fund free of tax (subject to the Lifetime allowance of £1,055,000). If he does after the age of 75, his nominated beneficiaries will receive the pension fund free of IHT but they will be taxed at their marginal rate of tax (20% / 40% / 45%).
So realistically he only has about 4k tax free each year.
He needs the 25% lump sum straight off tbh. I had planned to say to him to then just taken out an extra £10k per annum of the remaining pot as he wont need it as much.
My point is, I don't want him to take the whole 200k out and take the tax hit as he doesn't need all of it straight away. I had also said if he can get 100k and make it supplement his 9k pension pa, with say a 5% tax free return pa something like an ISA based Stocks and shares but in a low risk fund, then he can draw down bit by bit the remaining 150k.
He needs a plan but is very risk adverse. He already has around 40k in savings so the lump sum of 50k would take him to 90k.
He hasn't ever earnt more than 15k pa apart from way back nearly 30yrs ago (well in todays money comparison)...so he would be more than happy with a 20k lifestyle pa.
Hence my thoughts 9k pa state pension, 5k supplement via investment and then 5k drip fed into current account from any withdrawal...means then he shouldn't really be taxed much...but at first I was thinking more 10k pa drop fed from pension pot.
Sounds like a sensible plan. A financial adviser can add good value with the investment strategy.
A low risk profile is unlikely to achieve a return of 5% per annum. 3-4% is more realistic.
For reference I work for a small independent practise (5 advisers in total) in Tonbridge, Kent and have clients across the South-East. If you are in Kent or nearby, I'd be happy to have a no cost meeting with you and your father to discuss how I could help.
A low risk profile is unlikely to achieve a return of 5% per annum. 3-4% is more realistic.
For reference I work for a small independent practise (5 advisers in total) in Tonbridge, Kent and have clients across the South-East. If you are in Kent or nearby, I'd be happy to have a no cost meeting with you and your father to discuss how I could help.
benbuhagiar said:
Sounds like a sensible plan. A financial adviser can add good value with the investment strategy.
A low risk profile is unlikely to achieve a return of 5% per annum. 3-4% is more realistic.
For reference I work for a small independent practise (5 advisers in total) in Tonbridge, Kent and have clients across the South-East. If you are in Kent or nearby, I'd be happy to have a no cost meeting with you and your father to discuss how I could help.
Thank you. Trying my best for himA low risk profile is unlikely to achieve a return of 5% per annum. 3-4% is more realistic.
For reference I work for a small independent practise (5 advisers in total) in Tonbridge, Kent and have clients across the South-East. If you are in Kent or nearby, I'd be happy to have a no cost meeting with you and your father to discuss how I could help.
I see well that is still a good return for what he would like to risk
Were based in Hertfordshire, but thank you very much for the advice. That's really helped.
Kingdom35 said:
Not if its re-invested via an ISA or making interest and used to supplement the state pension etc?
It is not good advice to withdraw tax free cash and place it in an ISA. If he doesn't need to spend it, leave it in the pension.Your father really should meet with an IFA.
benbuhagiar said:
Sounds like a sensible plan. A financial adviser can add good value with the investment strategy.
A low risk profile is unlikely to achieve a return of 5% per annum. 3-4% is more realistic.
For reference I work for a small independent practise (5 advisers in total) in Tonbridge, Kent and have clients across the South-East. If you are in Kent or nearby, I'd be happy to have a no cost meeting with you and your father to discuss how I could help.
Our cautious portfolio has achieved an average return of over 7% a year over the last 10 years, more than doubling in value.A low risk profile is unlikely to achieve a return of 5% per annum. 3-4% is more realistic.
For reference I work for a small independent practise (5 advisers in total) in Tonbridge, Kent and have clients across the South-East. If you are in Kent or nearby, I'd be happy to have a no cost meeting with you and your father to discuss how I could help.
Sure, no one knows what the next 10 years will bring, but 3%-4% is a very conservative projection.
JulianPH said:
no one knows what the next 10 years will bring, but 3%-4% is a very conservative projection.
. ....perhaps 3-4% would be what's left after the IFA's new car and holiday home? Avoid.What OP should do is sit down and think about what they're trying to achieve. At first glance it seems barmy to interfere with a fairly modest "pot" which should keep growing nicely in the tax-free environment. Sounds bonkers to pull out 25% and then watch it wither away as a savings buffer.
Cash can be withdrawn as and when needed in the most tax-efficient fashion. i.e. a mix of income payments at minimum possible tax and repeated lump sum withdrawals completely tax free (up to the overall 25%).
Possibly a case for "one off" IFA advice to get everything pointing in the right direction if they don't have the confidence to make decisions based on what can be read on this forum in plain English and for free.
N.B. Can be advantageous to spend all other savings BEFORE raiding the pension pot! This point is often missed.
red_slr said:
How old is your dad?
65Thanks for all the advice so far everyone.
Are people saying if he does release the 25% then if he somehow (heaven forbid) had to go into care, that would be used to pay for it, but if it was in his pension pot then the it goes under the radar? and the government would have to pay for care fees?
Food for thought
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