Pension tax free amount

[CAPP0]

As most people are probably aware, you can take 25% from your pension pot tax free.

If you invest a sum in a pension, and it grows, are you eligible to take 25% of the original sum invested, or 25% at the point where you crystallise and draw down? In other words, if you invest £1000 and are eligible to take £250 tax free, but the £1000 grows to £1200 before you touch it, can you then take £300?

If you had a second pension, which you are already accessing, I presume you can still crystallise and draw the 25% from the other (above) pension regardless of what you have done with the second pension (albeit of course overall income tax etc still applies to any other drawdown)?

[98elise]

It's the point you draw it down.

[CAPP0]

98elise said:

It's the point you draw it down.

Thanks - thought so but wanted to check.

[Jawls]

CAPP0 said:

As most people are probably aware, you can take 25% from your pension pot tax free.

If you invest a sum in a pension, and it grows, are you eligible to take 25% of the original sum invested, or 25% at the point where you crystallise and draw down? In other words, if you invest £1000 and are eligible to take £250 tax free, but the £1000 grows to £1200 before you touch it, can you then take £300?

If you had a second pension, which you are already accessing, I presume you can still crystallise and draw the 25% from the other (above) pension regardless of what you have done with the second pension (albeit of course overall income tax etc still applies to any other drawdown)?

It’s 25% of crystallised funds. So in the first example, it would be £300. Of course, in practise it likely won’t be rational to crystallise the entire pot at once.

Edited by Jawls on Wednesday 27th October 14:16

[Carbon Sasquatch]

Which is why some people will take the 25% as soon as they hit 55 - but others will delay it as long as possible in the expectation of further growth & therefore more tax free cash.

[halo34]

Does the 25% count if you have DB pensions too?

Sorry for thread hijack.

But say you have 500k across the total pots @ 55 - can you take 125k out at that point. (assuming that in your SIPP you can cover that amount, rather than taking from the DB pension).

[trevalvole]

halo34 said:

Does the 25% count if you have DB pensions too?

Sorry for thread hijack.

But say you have 500k across the total pots @ 55 - can you take 125k out at that point. (assuming that in your SIPP you can cover that amount, rather than taking from the DB pension).

My feeling is that the DB pension would have to be going into payment. It may well also be that the DC pension would have to be crystalized and perhaps associated with the DB pension e.g. an AVC.

[WhiskyDisco]

In a scenario where I have £250k pension pot, and assume I want to take 5% of this as an annual pension (£12,500). As this is at the same level as my annual tax free allowance I would have no tax bill.

What is my additional tax-free allowance? Is it 25% of the value at the point where I start to draw. i.e. £250k I would take £62,500 tax free no matter when I take it?

or is it 25% of the value of the fund at the point where I take the 25% i.e. if I wait 10 years and the fund is now worth £150k I would take £37,500 tax free.

Also, do you have to take 25% or can you take less?

Edited by WhiskyDisco on Wednesday 27th October 15:38

[tertius]

WhiskyDisco said:

In a scenario where I have £250k pension pot, and assume I want to take 5% of this as an annual pension (£12,500). As this is at the same level as my annual tax free allowance I would have no tax bill.

What is my additional tax-free allowance? Is it 25% of the value at the point where I start to draw. i.e. £250k I would take £62,500 tax free no matter when I take it?

or is it 25% of the value of the fund at the point where I take the 25% i.e. if I wait 10 years and the fund is now worth £150k I would take £37,500 tax free.

Also, do you have to take 25% or can you take less?

Edited by WhiskyDisco on Wednesday 27th October 15:38

As above it’s 25% of the crystallised amount. So in your example where you want to use your personal allowance and take an income of £12,500 per year you could crystallise £16667 from your pension each year. Of that: 25% (£4,166) would be tax free and the remainder (£12,500) would use up your personal allowance, and this also be tax free.

[Carbon Sasquatch]

halo34 said:

Does the 25% count if you have DB pensions too?

Sorry for thread hijack.

But say you have 500k across the total pots @ 55 - can you take 125k out at that point. (assuming that in your SIPP you can cover that amount, rather than taking from the DB pension).

Each pot is considered separately

You should be able to withdraw some tax free cash from a DB but it will reduce the payments - and has to be done when you start drawing that pension.

With a DC you can take the tax free bit & leave the rest as long as you like.

The way the different DB schemes seem to value the tax free offered amount seems to vary quite a bit, so a little more complex than a DC scheme.

If you had an employer DC & DC scheme concurrently, then there might be a clause that allows them to be combined for tax free calculation purposes, but its rare and doesn't apply to completely independent schemes.

[WhiskyDisco]

tertius said:

As above it’s 25% of the crystallised amount. So in your example where you want to use your personal allowance and take an income of £12,500 per year you could crystallise £16667 from your pension each year. Of that: 25% (£4,166) would be tax free and the remainder (£12,500) would use up your personal allowance, and this also be tax free.

Thank you. I don't quite understand the comment above though, about delaying the tax free amount in order to get more tax free later. I get that the fund itself would grow, but the 25% of the crystalised amount would remain constant would it not?

[tertius]

WhiskyDisco said:

tertius said:

As above it’s 25% of the crystallised amount. So in your example where you want to use your personal allowance and take an income of £12,500 per year you could crystallise £16667 from your pension each year. Of that: 25% (£4,166) would be tax free and the remainder (£12,500) would use up your personal allowance, and this also be tax free.

Thank you. I don't quite understand the comment above though, about delaying the tax free amount in order to get more tax free later. I get that the fund itself would grow, but the 25% of the crystalised amount would remain constant would it not?

I think that is referring to the situation where people are crystallising their entire pension pot in one go - if they wait then the pot will (hopefully) have grown and so the 25% will also have grown.

The counter argument is to ask are you using all your allowances - e.g. imagine you are aged 55 and retired from full time work; if you decide to defer taking any pension (in the hope of future growth) and just rely on savings for the next few years then you are (possibly) losing your personal allowance each year; whereas if you crystallise £16.7k each year you are maximising use of your allowances, that you won’t ever get back. If you don’t need the money you can always invest it, it just happens to be outside of the pension wrapper.

[TwigtheWonderkid]

WhiskyDisco said:

tertius said:

As above it’s 25% of the crystallised amount. So in your example where you want to use your personal allowance and take an income of £12,500 per year you could crystallise £16667 from your pension each year. Of that: 25% (£4,166) would be tax free and the remainder (£12,500) would use up your personal allowance, and this also be tax free.

Thank you. I don't quite understand the comment above though, about delaying the tax free amount in order to get more tax free later. I get that the fund itself would grow, but the 25% of the crystalised amount would remain constant would it not?

As I understand it, you won't get more tax free later, but you will get more later. You have a pot of £400K. You start drawing on it aged 55, taking £12570 a year from the taxable £300K, tax free as you have no other income so this is your annual tax free allowance. You have £100K tax free to take, set in stone. But by not taking it, you continue to get growth on £400K, less what you take monthly, not £300K less what you take monthly.

But whatever you take from the taxable pot must be matched by 25% from the tax free pot. If you take £100 from the taxable pot, they will say "nope, it's £75 from the taxable pot and £25 from the tax free pot" whether you like it or not. The £100 withdrawal is split 75/25 between the taxable and tax free pots.

Hence people take the £12570 plus £4190 from the tax free pot, to give £16760 tax free a year.

Edited by TwigtheWonderkid on Wednesday 27th October 16:59

[Simpo Two]

WhiskyDisco said:

Thank you. I don't quite understand the comment above though, about delaying the tax free amount in order to get more tax free later. I get that the fund itself would grow, but the 25% of the crystalised amount would remain constant would it not?

I think what's foxing you is the word crystallisation. It doesn't mean the remaining 75% stops growing. It's still invested.

Edited by Simpo Two on Wednesday 27th October 17:49

[Carbon Sasquatch]

TwigtheWonderkid said:

As I understand it, you won't get more tax free later, but you will get more later. You have a pot of £400K. You start drawing on it aged 55, taking £12570 a year from the taxable £300K, tax free as you have no other income so this is your annual tax free allowance. You have £100K tax free to take, set in stone. But by not taking it, you continue to get growth on £400K, less what you take monthly, not £300K less what you take monthly.
[SNIP]

Incorrect - what is set in stone is any amount crystallised.

So take your 400k - you crystallise 100k - take 25k tax free & 75k is taxable.

If you leave the remaining 300k uncrystallised and it grows back to 400k - you could then crystallise the remaining 400k and take £100k tax free with 300k taxed.

Extreme example but you have managed to get 125k tax free rather than 100k if you'd crystallised in one go.

If you don't take a big lump sum, then you're likely to go with smaller more regular crystallisation to maximise the amount of tax free cash you can take out. Withdrawal strategy is a whole topic to consider when you're ready to retire.

[Mazinbrum]

You can also crystallise amounts and leave them in your SIPP.
Eg if your 57 you could crystallise £45720 a year, withdraw £11430 (25% tax free) and £12570 which wouldn’t be taxed, leave the remaining £21720 in your SIPP. The next year crystallise another £45720 from the remaining uncrystallised pot and do the same giving you £24k tax free a year until your whole pot is crystallised, which if you have at least £457200 in your pot (excluding growth), will give you £24k tax free every year for 10 years until you get your state pension when all your private pension will be taxed anyway.

[TwigtheWonderkid]

Carbon Sasquatch said:

TwigtheWonderkid said:

As I understand it, you won't get more tax free later, but you will get more later. You have a pot of £400K. You start drawing on it aged 55, taking £12570 a year from the taxable £300K, tax free as you have no other income so this is your annual tax free allowance. You have £100K tax free to take, set in stone. But by not taking it, you continue to get growth on £400K, less what you take monthly, not £300K less what you take monthly.
[SNIP]

Incorrect - what is set in stone is any amount crystallised.

So take your 400k - you crystallise 100k - take 25k tax free & 75k is taxable.

If you leave the remaining 300k uncrystallised and it grows back to 400k - you could then crystallise the remaining 400k and take £100k tax free with 300k taxed.

Extreme example but you have managed to get 125k tax free rather than 100k if you'd crystallised in one go.

If you don't take a big lump sum, then you're likely to go with smaller more regular crystallisation to maximise the amount of tax free cash you can take out. Withdrawal strategy is a whole topic to consider when you're ready to retire.

OK, fair enough. Every day's a skool day.

[WhiskyDisco]

Mazinbrum said:

You can also crystallise amounts and leave them in your SIPP.
Eg if your 57 you could crystallise £45720 a year, withdraw £11430 (25% tax free) and £12570 which wouldn’t be taxed, leave the remaining £21720 in your SIPP. The next year crystallise another £45720 from the remaining uncrystallised pot and do the same giving you £24k tax free a year until your whole pot is crystallised, which if you have at least £457200 in your pot (excluding growth), will give you £24k tax free every year for 10 years until you get your state pension when all your private pension will be taxed anyway.

Clever stuff. Thank you!

[SunsetZed]

Good thread, I completely get the argument for not crystallising the whole pot in the hope for future growth but I'm not clear on what happens to the uncrystallised pot upon death.

For example what happens if you die (aged under 75) and only half of your pot has been crystallised, is there an option for the beneficiary to crystallise the other 50% and take 25% of it as tax free cash or is the option to take tax free cash from that half of the pot lost at that point and tax at the beneficiaries marginal rate will be due on the entire portion of the uncrystallised pot?

[Carbon Sasquatch]

SunsetZed said:

Good thread, I completely get the argument for not crystallising the whole pot in the hope for future growth but I'm not clear on what happens to the uncrystallised pot upon death.

For example what happens if you die (aged under 75) and only half of your pot has been crystallised, is there an option for the beneficiary to crystallise the other 50% and take 25% of it as tax free cash or is the option to take tax free cash from that half of the pot lost at that point and tax at the beneficiaries marginal rate will be due on the entire portion of the uncrystallised pot?

Any tax free element is lost on death.

However, if you die under 75 then it passes to the beneficiaries completely free of tax anyway - it can be taken at any age and NOT subject to income tax.
If you die over 75, then the beneficiaries are taxed at their marginal rate - but can still withdraw the funds at any age and do not have to wait if they don't want to.

Another caution is that the tax treatment of SIPPs could change in any future budget.