Withdrawing money from a pension

[Profpointy]

Pension provider will tax it at source, quite possibly emergency tax. They'll likely then send you a partially filled form to sign and submit to HMRC to claims the excess tax back.

They didn't do that for me for the lump sum which came tax free. This paid off my mortgage and bought some ISAs as well as some to live on. I have two or three lesser pots to get my tax free sums from.

Once I started taking income drawdown they did tax at source I went for £12570 a year (all at once), the UK income tax threshold which did indeed get emergency taxed, so I had to wait till the following June to get my £4k tax back and am anticipated another £4k rebate shortly. This year I'm getting it monthly so it is now taxed normally ie they don't take it out at source as I'm not getting enough money if that makes sense. I think the rule was the first payment is taxed at emergency code but subsequently it's done "properly" so taking the £12k in a lump got taxed initially, though you get it back

 

[PaulSB]

There's so little in my pension pot then there is no point in buying an annuity, etc. It's just a case of taking it all out in the most tax efficient way possible. I'll take out 25% this year and the rest next year.

Does the pension provider deduct the tax when I withdraw the money or is it added to my taxable income for the year?

As above 25% is tax free. Anything remaining is classed as income and added to your total annual income on which you pay tax. I'm presuming you take this payment in one go, not spread through the year.

You probably will not have a tax code. The pension provider will apply income tax on any amount you withdraw under PAYE. If the provider doesn't have a tax code the emergency code will be applied. Reclaiming this tax from HMRC online is very simple.

 

[PaulSB]

They didn't do that for me for the lump sum which came tax free. This paid off my mortgage and bought some ISAs as well as some to live on. I have two or three lesser pots to get my tax free sums

That's correct. Drago is commenting on any income taken which is not part of the lump sum. The lump sum is paid gross.

 

[Alex321]

They didn't do that for me for the lump sum which came tax free. This paid off my mortgage and bought some ISAs as well as some to live on. I have two or three lesser pots to get my tax free sums from.

Once I started taking income drawdown they did tax at source I went for £12570 a year (all at once), the UK income tax threshold which did indeed get emergency taxed, so I had to wait till the following June to get my £4k tax back and am anticipated another £4k rebate shortly. This year I'm getting it monthly so it is now taxed normally ie they don't take it out at source as I'm not getting enough money if that makes sense. I think the rule was the first payment is taxed at emergency code but subsequently it's done "properly" so taking the £12k in a lump got taxed initially, though you get it back

The way PAYE works is that they take the total amount you have been paid so far this year, divide by the number of months so far in the tax year, multiply by 12 to get your projected annual income. Work out the tax due on that projected annual income, then do the reverse with that (divide by 12, then multiply by number of months so far in the tax year). That gives the total amount of tax you should have paid so far this year, and they deduct an amount from your payment to take it up to that.

So even without emergency tax code, if you take the whole amount of the threshold in the first month, it gets calculated as if your annual earnings will be 12 times that.

 

[Drago]

They didn't do that for me for the lump sum which came tax free. This paid off my mortgage and bought some ISAs as well as some to live on. I have two or three lesser pots to get my tax free sums from.

Aye, the lump sum is tax free. I was referring to any tax on anyrhing above and beyond the tax free allowance.

 

[BigSid]

No you can't.

You can take 25% ONCE without paying tax.
https://www.legalandgeneral.com/retirement/pension-drawdown/

Before choosing pension drawdown, it's important to understand the main taxation rules:

The first 25% of your pension pot is usually tax-free. To be able to access any tax-free cash, you'll need to do this at outset as you can't take any tax-free cash after you've moved your pension pot into drawdown.

All income or subsequent drawdowns will be subject to income tax. This means that if you take large amounts out in a single tax year, you could end up in a higher tax bracket, and pay a higher rate of tax, than you would otherwise.

That is a feature of L&G's drawdown product.
Link as above - page16

If you don’t take the full 25% when you set up your plan, our product doesn’t currently allow you to take the tax-free allowance later. The remaining pot will be taxable when you choose to take it. Other providers may let you access your tax-free cash in stages.

This was a surprise to me as I had been advised that if I had £100k pot and wanted £5k I'd get the £5k (tax free) and £15k (taxable) would be put into a sub account.
If the remaining £80k grew back to £100k I would have 25% of that still available tax free.
Just another question to ask when moving your pot to drawdown if you don't need the full 25% when you start to receive your pension.
Every day's a school day even at 64.

 

[T4tomo]

There's so little in my pension pot then there is no point in buying an annuity, etc. It's just a case of taking it all out in the most tax efficient way possible. I'll take out 25% this year and the rest next year.

Does the pension provider deduct the tax when I withdraw the money or is it added to my taxable income for the year?

I assume you have a plan to fund your retirement other than just the state pension?

 

[Alex321]

That is a feature of L&G's drawdown product.
Link as above - page16

If you don’t take the full 25% when you set up your plan, our product doesn’t currently allow you to take the tax-free allowance later. The remaining pot will be taxable when you choose to take it. Other providers may let you access your tax-free cash in stages.

It is still only 25% of your total pot though.

This was a surprise to me as I had been advised that if I had £100k pot and wanted £5k I'd get the £5k (tax free) and £15k (taxable) would be put into a sub account.

That just sounds weird.

If the remaining £80k grew back to £100k I would have 25% of that still available tax free.

I'm not convinced of that either.

But it is very diffuicult to work out the exact situation. Which it shouldn't be.

This is what the government say.
https://www.gov.uk/tax-on-pension/tax-free

Just another question to ask when moving your pot to drawdown if you don't need the full 25% when you start to receive your pension.
Every day's a school day even at 64.

Indeed.

 

[fossyant]

Please don't misunderstand me but if you need to ask this question you need to find a financial adviser.

You don't, but then I am an accountant by trade. FA's are a bit like cars salesmen.

 

[fossyant]

You do need to look into each scheme. I took the 25% from a couple of spare pensions earlier this year to buy the van. I don't need either but the remainder will now just sit there. I had another scheme, from when I first started working, that made no economic sense to leave it till 67 as I'd need to be 85 before I broke even by taking some now and it paying me monthly (despite a big tax hit). My main pension should give me a nice amount on it's own by early 60's. Looks OK now at 55, looks great by 67, but somewhere in-between will be enough should I decide to go early.

I wouldn't have taken any if it was my main scheme and had done the figures. Just ask your pension provider(s) for the figures. It's 25% of each pot that is tax free. That goes to 57 soon, and who knows what may happen in a few years !

 

[Alien8]

It depends upon crystallisation of the funds.
You can use UFPLS where 25% of the withdrawal will be taken free and the remainder of the withdrawal taxed at your applicable rate.
The remainder of the fund is uncrystallised and subsequent (UFPLS) withdrawals will follow the same pattern.
This means that the total value of your tax free element over the lifetime of the pension could amount to more than 25% of your pot value when you first access it.
Note that the total tax free element is limited by the Lump Sum Allowance of £268,275 (may be larger for some).
UFPLS withdrawals also trigger the Money Purchase Annual Allowance (which limits the size of any future contributions).
UFPLS may be tax efficient for some - as always it depends upon the specifics of the individual.
Specific scheme providers will dictate/restrict how you can access/drawdown your pot.