Pension in pension out tax
Discussion
When you pay into a pension fund you get tax relief, so in simplistic terms the amount you pay into the fund is increased by the tax relief. The fund then charges you for the privilege of looking after your money so the fund manager can have a nice new car and you hope he will invest what is left wisely so it grows a bit. When eventually you draw the Pension you pay tax on the income so you effectively pay back the tax benefit.
Now I understand the idea is the fund should grow and the amount that is growing is more by the amount of relief. Apart from that, as you pay tax on it when you get it back why is it better to invest within a pension rather than outside. Unless you are a higher rate payer on the way in and a lower rate on the way out, then I can see the benefit.
Now I understand the idea is the fund should grow and the amount that is growing is more by the amount of relief. Apart from that, as you pay tax on it when you get it back why is it better to invest within a pension rather than outside. Unless you are a higher rate payer on the way in and a lower rate on the way out, then I can see the benefit.
steve-V8s said:
Unless you are a higher rate payer on the way in and a lower rate on the way out, then I can see the benefit.
This is a definite tax benefit, but even if you are a lower rate tax payer going in then you would benefit as upon retirement you get a clean annual allowance each year which is tax free.Steve-you pay zero tax and possibly zero NI on up to 40k per annum (currently). You can pay zero tax on the way out and the maximum, notwithstanding LTA breaches, you will pay over 25% less tax (25% tax free and 12.570).
The asset managers/pension fund managers (same thing) will charge an annual fee from day one until you exit all funds. They will also charge you to withdraw funds depending on how you take money out and crystallise the pot(s).
Depending on how you contribute to a pension, you may claim 20% at source and if a higher rate tax payer, another 20% is claimed via Self Assessment(SA) (+5% higher rate). This amount is paid out to you directly if there is an overall refund to be paid on SA so it's up to you to wire it to your asset manager or just trouser it. You would actually get another 20% if you sent it back into the fund
The asset managers/pension fund managers (same thing) will charge an annual fee from day one until you exit all funds. They will also charge you to withdraw funds depending on how you take money out and crystallise the pot(s).
Depending on how you contribute to a pension, you may claim 20% at source and if a higher rate tax payer, another 20% is claimed via Self Assessment(SA) (+5% higher rate). This amount is paid out to you directly if there is an overall refund to be paid on SA so it's up to you to wire it to your asset manager or just trouser it. You would actually get another 20% if you sent it back into the fund
Edited by Burwood on Wednesday 22 December 13:46
anonymous said:
[redacted]
It's not quite like that. Split your total pension pot into 2. Pot A, 75% of the pot, it taxable. Pot B, 25%, is tax free. You can take money out of pot B in whatever way you wish. All of it on day 1, or none of it, or bits of it. But any money you take from pot A has to be matched with the appropriate from pot B, taken now or in the past if you took out a lump from pot B. . So if you just want to take £100 out, and want to take it all from pot A, you can't. You will need to take £75 from pot A and £25 from pot B. So using your example about, you can take £3470 from pot A, tax free, to hit your personal allowance. But you must take at least £1157 from pot B to balance it.
i4got said:
If you have a few years of no other income after 55 you can draw out about £12.5k per year totally tax free in addition to the tax free element of the pension itself just using your tax allowance.
This is key. Retire at 55 today, 12 years before state pension age, will no other earned income, and you can get £16760 out a year tax free. That's £201,120 out without paying a bean in tax. £50,280 will have come from your tax free pot B (see my post above), and £150,840 from pot A, your taxable pot. Edited by i4got on Wednesday 22 December 14:39
TwigtheWonderkid said:
i4got said:
If you have a few years of no other income after 55 you can draw out about £12.5k per year totally tax free in addition to the tax free element of the pension itself just using your tax allowance.
This is key. Retire at 55 today, 12 years before state pension age, will no other earned income, and you can get £16760 out a year tax free. That's £201,120 out without paying a bean in tax. £50,280 will have come from your tax free pot B (see my post above), and £150,840 from pot A, your taxable pot. Edited by i4got on Wednesday 22 December 14:39
Another plus for pensions over ISAs etc is compound growth on the pension tax relief in the early stages of building your pot.
TwigtheWonderkid said:
It's not quite like that.
It's not quite like that either, although I get what you're trying to say.If your whole pot is uncrystallised (nothing taken from it) then you can take 25% tax free, either all in one go or in a number of smaller amounts. Taken in one go, you'll either have to take the other 75% as a taxable sum or put the 75% into drawdown or buy an annuity with it. Assuming it goes into drawdown you can then control any withdrawals between none or all of it.
Taking Uncrystallised Funds Pension Lump Sum (UFPLS) withdrawals from the uncrystallised pot will always give you 25% tax free and 75% taxable of the total amount you draw.
Should you just want a tax free lump sum multiple times over in different tax years then you can phase the move into drawdown. Using an example of a £100,000 uncrystallised pot you could crystallise £20,000 to give you £5,000 tax free, £15,000 into drawdown and no taxable income. Assuming the value is static you could then do the same thing another four times, giving you just a tax free lump sum each time but adding more to the drawdown account. When you're fully crystallised you're then stuck with only taxable withdrawals from the drawdown pot.
Mazinbrum said:
TwigtheWonderkid said:
i4got said:
If you have a few years of no other income after 55 you can draw out about £12.5k per year totally tax free in addition to the tax free element of the pension itself just using your tax allowance.
This is key. Retire at 55 today, 12 years before state pension age, will no other earned income, and you can get £16760 out a year tax free. That's £201,120 out without paying a bean in tax. £50,280 will have come from your tax free pot B (see my post above), and £150,840 from pot A, your taxable pot. Edited by i4got on Wednesday 22 December 14:39
anonymous said:
[redacted]
I think the penny just dropped with me why my FA was suggesting I take the 25% tax free allowance: I couldn't see the point as it would reduce the amount I'd get paid each month when I start drawing on my pension. Since I have other savings for emergencies and we've pretty much done all we want to the house and will change the car before then, so having a lump sum seemed more of a problem to me as I'd then wonder what to do with it. However, if the pension didn't take me above the tax threshold in the (7) years before I'm able to draw my State pension, then maybe not worth taking the tax free lump sum? [Stands back waiting for the PH horror that I could live off such a pittance
though I do also receive a tax free War Pension from the MOD]. TwigtheWonderkid said:
This is key. Retire at 55 today, 12 years before state pension age, will no other earned income, and you can get £16760 out a year tax free. That's £201,120 out without paying a bean in tax.
We are doing exactly that as a couple so the first £33,500 will be net money. And then at 67 we'll reduce that to just top up state pension to the threshold which will also hopefully still keep us just under the LTA. In both cases we use ISA savings to complement income and sadly that has been taxed to start with but a big chunk of it is growth anyway so not too fiscally painful. The next challenge will be minimising IHT or tax on pension but that's not quite as simple.
I would encourage the OP to max out pension tax relief while he can as it might not always be as generous as it is now.
OldSkoolRS said:
I think the penny just dropped with me why my FA was suggesting I take the 25% tax free allowance: I couldn't see the point as it would reduce the amount I'd get paid each month when I start drawing on my pension.
There's a good argument for taking the full 25% tax free allowance as soon as you can and investing it in a Stocks & Shares ISA, spread over a few years (and maybe using spouse's ISA also to double up allowances) depending on how much it is. Then any income/growth it generates, or whatever your sustainable/safe withdrawal rate is, can be taken free of income tax whenever you fancy to supplement your pension income.
As well as being tax efficient this approach guards against any future government changes to limit the tax free allowance, or if you have any chance of breaching the Lifetime Allowance (LTA).
I can't see any real big disadvantages over the phased/staggered UFPLS route discussed above apart from for IHT purposes which favour leaving money in pensions for as long as possible. Even that may not last though. And a spouse or partner can still inherit ISA holdings free of IHT, so that is only a concern if you want to leave to other relatives.
You can invest in pretty much exactly the same asset mix/allocation in an ISA as is held in your pension if you want, so you are not sacrificing future growth.
Edited by WayOutWest on Thursday 30th December 11:20
WayOutWest said:
OldSkoolRS said:
I think the penny just dropped with me why my FA was suggesting I take the 25% tax free allowance: I couldn't see the point as it would reduce the amount I'd get paid each month when I start drawing on my pension.
There's a good argument for taking the full 25% tax free allowance as soon as you can and investing it in a Stocks & Shares ISA, spread over a few years (and maybe using spouse's ISA also to double up allowances) depending on how much it is. Then any income/growth it generates, or whatever your sustainable/safe withdrawal rate is, can be taken free of income tax whenever you fancy to supplement your pension income.
As well as being tax efficient this approach guards against any future government changes to limit the tax free allowance, or if you have any chance of breaching the Lifetime Allowance (LTA).
I can't see any real big disadvantages over the phased/staggered UFPLS route discussed above apart from for IHT purposes which favour leaving money in pensions for as long as possible. Even that may not last though. And a spouse or partner can still inherit ISA holdings free of IHT, so that is only a concern if you want to leave to other relatives.
You can invest in pretty much exactly the same asset mix/allocation in an ISA as is held in your pension if you want, so you are not sacrificing future growth.
Edited by WayOutWest on Thursday 30th December 11:20
TwigtheWonderkid said:
One disadvantage is that your pension, on the whole, will have better growth than other investments, including ISAs. My pension has certainly performed far better than any other investments I have in recent years.
Codswallop. A pension is a wrapper, not an investment. Hold the same investment in an ISA and you'll get the same performance. PistonHead007 said:
TwigtheWonderkid said:
One disadvantage is that your pension, on the whole, will have better growth than other investments, including ISAs. My pension has certainly performed far better than any other investments I have in recent years.
Codswallop. A pension is a wrapper, not an investment. Hold the same investment in an ISA and you'll get the same performance. TwigtheWonderkid said:
It would have to be a stocks and shares ISA to have any chance of getting close. In my experience (a sample of 1, admittedly), they haven't got anywhere near the performance of my SIPP.
ISA and pensions are just wrappers, not investments.The content is entirely up to you and can be exactly the same if you want to. In fact I could have a 100% bond pension and a 100% S&S ISA.
The apparent performance difference between equivalent content ISA and Sipp may simply be down to the tax relief (ie "free" money).
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