Understanding how to draw down tax free out of pension

[nickfrog]

Please kindly sense check my understanding of what I think I can do:

Say I have a £500k pot at the age of 55 and retire. And say I only need £20k a year out of my capital as my £12.5k allowance is taken up by other income from property rental and my wife would be mirroring what I am doing.

Can I "crystalise" (perhaps that's not the right word) £80k in year 1, take 20% of it tax free and leave the £60k balance invested like the £420k uncrystalised?

The thinking is that I would like to do that every year until at least 67 and that the £480k leftover will grow (hopefully) and at least partially offset for the money I take out.

So for instance in year 2 and assuming 2% growth I would crystalise another £80k out of my now £489,600 to take another £20k tax free. And so on...

I am ignoring inflation for simplicity...

Edited by nickfrog on Tuesday 21st January 14:21

[nickfrog]

mikeiow said:

Note that as soon as you touch a penny of anything in drawdown, you invoke the MPAA, & can then only deposit up to £4k pa into any pension scheme.

Thanks Mike. My wife's half is with Aviva so that's good to hear. Hopefully Aegon offer the same facility for me.

Re the above quote, is that part of the recycling rules? I thought is was £7.5k pa for some reason. Not really a problem either way as I guess I can't claim relief on it if I don't pay tax anymore.

[nickfrog]

mikeiow said:

(just someone with a overly keen interest in pensions at this point in my life

You and me both! I'll be honest, it's a great feeling.

[nickfrog]

Cheers. Yes, a bit of a flaw in my thinking, however what you say makes sense indeed. Will xls it.

[nickfrog]

JulianPH said:

Yes.

Actually Julian the assumption in my OP was wrong as I didn't realise the rate of depletion of my crystalisation headroom was much quicker than I thought and I would run out way before 67 as highlighted by SBI.
To not pay any tax until 67 while starting to crystallise at 55, I would need £520k to start with, a yearly growth of 5% and take £14,000 a year which is my new working assumption. Which means selling off a property at 55 which is no biggie as this would limit CGT exposure on that asset.

[nickfrog]

JulianPH said:

If you would like an actuarial projection with different growth rate assumptions then just give me a shout.

Cheers Julian but now all encapsulated in xls and can move all the levers at will.

[nickfrog]

You shouldn't be far off £1 million by the time you're 70 on that basis.

[nickfrog]

Ah yes of course. I don't have that problem sadly. Although I have the inheritance tax issue with other assets so we will have to live in luxury to help the kids not pay (too much) tax when we're gone.

[nickfrog]

Thanks Chip. Very useful. From earlier in this thread it looks like some pension providers offer the facility of setting up the phasing, like Aviva. I wonder if that attracts any additional fees on top of the "normal" fees.

We have half with Aviva and half with Aegon so this could make the difference between staying with one or move to the other.

[nickfrog]

Once again thank you so much chip, that's invaluable. I am not in drawdown mode yet and I am paying 0.55% up to £30k, 0.3% up to £200k and 0% beyond that with Aegon. It is my workplace thing so maybe they negociated a better deal, hence the difference.

Or do the platform fees come on top of that once I start drawing down? I hope not and that the only added cost in drawdown mode is the £75 pa fee. Not sure, would you by any chance know?

[nickfrog]

JulianPH said:

Platform fees are only a small slice of the overall costs. Fund management fees and adviser fees come on top of this.

Forgive me, but would you mind saying who is providing the drawdown for £75 a year?

Aegon, first on the table. Are you saying that platform fees only kick in when you start drawing down? The fees I have described are the only ones I am paying AFAIK.

[nickfrog]

JulianPH said:

No, I am saying that (if you use one) platform fees are payable at all times, but are only part of your overall fees. They frequently increase during drawdown, but not always (if they were expensive enough to start with).

I am guessing you might be using Cofunds (now part of Aegon). This is not bad pricing, to be honest.

I have no other fees though. But I will double check. So if the only additional cost is the £75 pa once I go into drawdown then I'm laughing.
Not with Cofunds.

[nickfrog]

I thought I would revive this thread which I know has helped others.

I have accepted that it will make sense to sell off our BTL property when I retire at 55, not only because I reckon the CGT exposure will start being unreasonable by then (unless the property market collapses) but also because the rental yield eats up into my tax free allowance.

I therefore have two questions on the assumption that I will have no other taxable income than our pension:

- is it right that we can pay in £2,880 each into our pension and that HRMC still tops up to £3,600 even if we pay £0 income tax ?

- does it make sense to invest the property sales proceeds via ISA at a rate of £20k a year each ? Or should we / can we pay it into our pension without HMRC's top up ? I can see that ISA savings won't trigger any tax on exit either as an income or a capital growth.

Thanks for any pointers.

Nick

[nickfrog]

Skyedriver said:

Couple of probably ill informed comments from a 67 year old dummy

Once you start drawing the pension you can only add up to £4000/annum

When you take money from your fund you'll get it gross now and HMRC will steal a bit later (or guess what you are gong to take and provide a revised tax code). Last year the provider took money out to cover the 20%.tax on the balance after the 25% tax free bit.

And be prepared for a few puzzling phone calls from you to HMRC while you try to understand why the tax code has reduced by the amount of your state pension sum. I couldn't get my head around that.

Cheers. I think I got the £2,880 wrong as this is only if income is less than £3,600/year. I am probably still limited by the recycling rule but even if I don't fall foul of that, the ISA route might be better anyway in my case.

I can see why HMRC would lower your tax code as state pension is taxable I guess.

[nickfrog]

Mr Pointy said:

nickfrog said:

- is it right that we can pay in £2,880 each into our pension and that HRMC still tops up to £3,600 even if we pay £0 income tax?

Yes, that's correct. Note the limit once you go into drawdown though.

Thanks a lot - I am not sure I understand - are you saying that facility stops as soon as I am in drawdown (whether tax free or taxed) ?

Mr Pointy said:

nickfrog said:

- does it make sense to invest the property sales proceeds via ISA at a rate of £20k a year each ? Or should we / can we pay it into our pension without HMRC's top up ? I can see that ISA savings won't trigger any tax on exit either as an income or a capital growth.

It's surely not worthwhile paying extra into a pension if you're not getting any tax relief going in & it's subject to tax (possibly) when you withdraw any money. The main advantage of a pension is the tax relief on the contributions whereas the advantage of ISAs is that withdrawals (& any gains) are not subject to income tax.

Yes I can see that now, ISA is the way to go for lump sumps that have already been taxed. Thx again.

[nickfrog]

98elise said:

The problem with the LTA is that if the past few years growth continues then I'm only a few years from breeching it.

Thanks for highlighting the LTA. I didn't consider it. Having done a few simulations based on various investment growth this is a risk for me too at some point so it seems that ISAing tax free chunks is a decent mitigating measure, particularly if we time it right so that we get £80k between us at the end / start of a tax year, rinse and repeat every year.

[nickfrog]

xeny said:

If you're using both years' ISA allowances, then every _other_ year. ?

True.

[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?

[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?).