Income Tax on pension

[CAPP0]

Just wanted to confirm that my understanding is correct here. Didn't want to bury it in the IM thread (NB, JulianPH, the process we recently discussed offline is close to completion now and I will be speaking to Nik after then!)

Anyway:

Assume a pension pot of £1m, and you don't draw any initial lump sum.

So, once crystallised there is £250k available tax-free?

So if you drew a pension of £45k p.a.(ignore state pension for the moment), you would be taxed as follows:

Tax Free 25%: £11,250
Gross Taxable: £33,750
Nett after tax: £29,500 (from an online calculator. no NI on pension income)
Total Nett: £40,750

Is that broadly correct?

[Stay in Bed Instead]

You are rather confusing matters.

You are entitled to 25% tax free cash on any funds crystallised, with the balance crystallised funds being available to provide pension. So your £45,000 example is correct.

The balance of your pension arrangement remains uncrystallised for future use. Future 25% tax free cash will be available upon future crystallisations from it.

[JulianPH]

CAPP0 said:

Just wanted to confirm that my understanding is correct here. Didn't want to bury it in the IM thread (NB, JulianPH, the process we recently discussed offline is close to completion now and I will be speaking to Nik after then!)

Anyway:

Assume a pension pot of £1m, and you don't draw any initial lump sum.

So, once crystallised there is £250k available tax-free?

So if you drew a pension of £45k p.a.(ignore state pension for the moment), you would be taxed as follows:

Tax Free 25%: £11,250
Gross Taxable: £33,750
Nett after tax: £29,500 (from an online calculator. no NI on pension income)
Total Nett: £40,750

Is that broadly correct?

Assuming no other taxable income, absolutely bang on!

• £45,000 - 25% (tax free element) = £33,750 of taxable income.

• £33,750 - £12,500 (annual personal allowance) = £21,250.

• £21,250 - 20% income tax (and you are right, no NI) = £17,000

• £17,000 (taxable income after tax) + £12,500 (non-taxable personal allowance) + £11,250 (tax free cash element = £40,750!

So the tax on the £45,000 annual drawing is just £4,250 (9.44%).

So if you received 20% or 40% tax relief going in, you are paying less that half or a quarter of this coming out.

[CAPP0]

JulianPH said:

CAPP0 said:

Just wanted to confirm that my understanding is correct here. Didn't want to bury it in the IM thread (NB, JulianPH, the process we recently discussed offline is close to completion now and I will be speaking to Nik after then!)

Anyway:

Assume a pension pot of £1m, and you don't draw any initial lump sum.

So, once crystallised there is £250k available tax-free?

So if you drew a pension of £45k p.a.(ignore state pension for the moment), you would be taxed as follows:

Tax Free 25%: £11,250
Gross Taxable: £33,750
Nett after tax: £29,500 (from an online calculator. no NI on pension income)
Total Nett: £40,750

Is that broadly correct?

Assuming no other taxable income, absolutely bang on!

• £45,000 - 25% (tax free element) = £33,750 of taxable income.

• £33,750 - £12,500 (annual personal allowance) = £21,250.

• £21,250 - 20% income tax (and you are right, no NI) = £17,000

• £17,000 (taxable income after tax) + £12,500 (non-taxable personal allowance) + £11,250 (tax free cash element = £40,750!

So the tax on the £45,000 annual drawing is just £4,250 (9.44%).

So if you received 20% or 40% tax relief going in, you are paying less that half or a quarter of this coming out.

Thanks Julian, good to know!

[Simpo Two]

Stay in Bed Instead said:

You are rather confusing matters.

You are entitled to 25% tax free cash on any funds crystallised, with the balance crystallised funds being available to provide pension. So your £45,000 example is correct.

The balance of your pension arrangement remains uncrystallised for future use. Future 25% tax free cash will be available upon future crystallisations from it.

That would appear to mean that you could take out 25% PCLS, then a bit later another 25% of the remaining 75%, then another 25% of that remainder... and so on.

From my POV once I've had the PCLS anything else goes in the bucket marked 'income tax'; I thought it was all crystallised...

Edited by Simpo Two on Monday 4th May 19:36

[rfisher]

I refer the honourable Simpo Two to the question wot I have posted on the main IM sticky.

I expect Julian or Nik will be along to confirm that it's a one off tfls withdrawal shortly.

[Simpo Two]

rfisher said:

I refer the honourable Simpo Two to the question wot I have posted on the main IM sticky.

Honourable? OK I'll take that

Perhaps one can uncrystallise one's pension by dissolving it in hot water. If pensions were scientific, it would work.

[CAPP0]

I’m not sure if I’m reading the replies above correctly; if I’m taking a drawdown pension, can I leave the 25% tax free crystallised within the overall pot and draw it monthly (as 25% of my overall monthly draw) or do I have to take it all out in one hit?

[craig1912]

CAPP0 said:

I’m not sure if I’m reading the replies above correctly; if I’m taking a drawdown pension, can I leave the 25% tax free crystallised within the overall pot and draw it monthly (as 25% of my overall monthly draw) or do I have to take it all out in one hit?

Think I’m right in saying you crystallise it as you go along. So crystallising £4000 gives you £1000 TFC and £3000 potentially taxable.

[CAPP0]

craig1912 said:

CAPP0 said:

I’m not sure if I’m reading the replies above correctly; if I’m taking a drawdown pension, can I leave the 25% tax free crystallised within the overall pot and draw it monthly (as 25% of my overall monthly draw) or do I have to take it all out in one hit?

Think I’m right in saying you crystallise it as you go along. So crystallising £4000 gives you £1000 TFC and £3000 potentially taxable.

That would be my chosen route, thanks! I'll try to get that verified.

[Stay in Bed Instead]

Simpo Two said:

That would appear to mean that you could take out 25% PCLS, then a bit later another 25% of the remaining 75%, then another 25% of that remainder... and so on.

From my POV once I've had the PCLS anything else goes in the bucket marked 'income tax'; I thought it was all crystallised...

Edited by Simpo Two on Monday 4th May 19:36

No it doesn't.

PCLS is only available from uncrystallised funds.