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How to Drawdown

WindhoverDave
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Joined: October 17th, 2021, 6:38 pm

How to Drawdown

#453152

Postby WindhoverDave » October 26th, 2021, 11:09 am

Hi All

I'm retiring aged 64 next March/April if circumstances are right.

II've got a work DC pension that's got approx £400,000 in it and I want to draw down on it for a year without taking any money from other savings which are in a stocks and shares ISA.

But what's the best way to drawdown? And what questions do I need to ask of my drawdown company? And what's the best company to drawdown with?

I can take out up to £100,000 tax free is my understanding.

But presumably I will get taxed on that - but I'll be able to claim it back at the end of the tax year, Is that right?

I've still got dependent kids so I reckon I'll need £3,000 a month for 12 months, then I've got a Final Salary Pension that kicks in - meaning I'll take out less the next year. Wife's still working too.

So am I better taking out £3,000 a month drawdown for that year - or will it cost more drawing down monthly than it will taking a one off £40,000 to last me the year?

I'm new to the pension game and didn't realise what a minefield it was - though I might have guessed.

Any thoughts gratefully received.

Best wishes

swill453
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Re: How to Drawdown

#453165

Postby swill453 » October 26th, 2021, 11:37 am

If in that (tax) year you're not going to otherwise use your personal allowance, I would drawdown that amount (£12,570 this year) in taxable drawdown. You will get taxed on it, but can immediately claim it back using the P55 form.

To enable you to do that, you need to crystallise some or all of your pension. In doing so you get tax free money which isn't taxed at source. It might make sense to do a partial crystallisation and just take the balance of the £40,000 that you need i.e. £27,430. This would entail crystallising £109,720.

I can't comment on "drawdown companies" as I'm not familiar with them. My pension is a SIPP with AJ Bell, and they would do all of the above with no charge (other than their ongoing custody fee).

Scott.

Urbandreamer
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Re: How to Drawdown

#453179

Postby Urbandreamer » October 26th, 2021, 12:12 pm

I am not retired and no expert, however I'll try and answer a few questions.

Different pension providers have different charges, so it's not really possible to say that it will cost more, or less taking a years pension over 12 months or as a lump sum. I've never seen that it's cheaper taking it as a lump sum, but there may be some provider that makes it so.

It's a really bad idea to do so in April as the tax man will assume that you are taking that much out each month leading to extra work and tax.
Doing so in March may not have such a bad effect, as they know that you didn't do so over the last 11 months of the tax year. You will simply have had to survive from money on deposit or your ISA to avoid extra effort or tax.

I personally would not be taking 1/4 as a lump sum. Instead I would "crystalise" one to two years worth of pension. This simply means that it moves to a different pot. I'm not sure if the tax free part can remain invested at that point, which is why a "partial drawdown". It's not a bad idea though to have some of your pension in "safer" assets like cash.

It's my understanding that the tax free amount is... err tax free. Were you to actually decide to take the £100k tax free amount it wouldn't be taxed.
As I understand things you can also take 75% a month as taxable and 25% as tax free. Though if that 75% is withing your personal allowance, no tax will be charged.

You say that you need £3kpcm, are you sure? That's £36kpa net. The taxable pension portion would be £27k or £14.5 after personal allowance. So you you would need to draw slightly more to cover the tax. Do you actually want to pay that tax? You could draw less and make up the difference from your ISA so avoiding tax.

I STRONGLY advise finding out more about your work DC scheme. Most are with big providers like Aviva or Scottish Widows. They have websites that explain how their systems work. My work DC is with Aviva and how much I move into drawdown, take per month and what I'm invested in is under my control. I don't think that they expect someone else to do it for me when I retire.

If it's all a bit much to grasp then paying a IFA may be money well spent. It won't be cheap though.

Ps, before you do so, contact PensionWise. It's free guidence paid for by the government.

TUK020
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Re: How to Drawdown

#453185

Postby TUK020 » October 26th, 2021, 12:20 pm

This becomes a game on managing your income to suit your tax thresholds.
You should ensure that you are using your full tax free allowance, and avoiding where possible any incursion into higher rate bands (and hopefully LTA).
You don't say how big your DB pension scheme is, so no idea if DB + State Pension + SIPP drawdown is at risk of hitting higher rate threshold.

Advantages of pulling income out of SIPP early and banking it in your ISA = if you then need a lump sum later (eg car replacement etc), you don't have to worry about exceeding higher rate threshold later.
Advantages of holding funds within SIPP is that this becomes an IHT efficient way of passing money to next generation.

pje16
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Re: How to Drawdown

#453189

Postby pje16 » October 26th, 2021, 12:22 pm

Urbandreamer wrote:It's a really bad idea to do so in April as the tax man will assume that you are taking that much out each month leading to extra work and tax.
Doing so in March may not have such a bad effect, as they know that you didn't do so over the last 11 months of the tax year. You will simply have had to survive from money on deposit or your ISA to avoid extra effort or tax.

I'm no expert but have heard about the above on many occasions
Isn't it about time HMRC got their act togther and asked the question, 1 off or every month
or is that too much to hope for :roll:

ursaminortaur
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Re: How to Drawdown

#453194

Postby ursaminortaur » October 26th, 2021, 12:47 pm

WindhoverDave wrote:Hi All

I'm retiring aged 64 next March/April if circumstances are right.

II've got a work DC pension that's got approx £400,000 in it and I want to draw down on it for a year without taking any money from other savings which are in a stocks and shares ISA.

But what's the best way to drawdown? And what questions do I need to ask of my drawdown company? And what's the best company to drawdown with?

I can take out up to £100,000 tax free is my understanding.

But presumably I will get taxed on that - but I'll be able to claim it back at the end of the tax year, Is that right?

I've still got dependent kids so I reckon I'll need £3,000 a month for 12 months, then I've got a Final Salary Pension that kicks in - meaning I'll take out less the next year. Wife's still working too.

So am I better taking out £3,000 a month drawdown for that year - or will it cost more drawing down monthly than it will taking a one off £40,000 to last me the year?

I'm new to the pension game and didn't realise what a minefield it was - though I might have guessed.

Any thoughts gratefully received.

Best wishes


Since you only need to cover one year until your final salary pension kicks in then the best bet would probably be to use flexi-access drawdown to crystallise the DC pension and take the 25% tax free lump sum which would give you £100,000 tax free. Assuming you don't have other urgent uses for that then you can live off that during the year - possibly putting £20,000 of it in an ISA (or even £40,000 in an ISA if you have a wife and she can put it in her ISA). There is no need to take any taxable money out of the drawdown pension at this point.

Once you get your final salary pension next year then you can decide how much you want to then start taking out of the crystallised DC pension to top up your final salary pension income in the future (possibly taking less in the first year as you may still have some of the DC pension tax free lump sum left and the DB pension may come with its own tax free lump sum*.)


* Some older DB pensions came with an automatic lump sum often something like 3x the pension but newer ones often don't come with any automatic lump sum and require you to convert some of your annual income into the tax free lump sum if you wish to take one. These commutation rates - amount of tax free lump sum you get for each £1 of income given up - are often pretty poor value so you may in those circumstances not want to take a lump sum from the DB pension. The commutation rate for most public sector schemes is as low as 12 whuch is very poor value. About the minimum level which might be considered just acceptable would be 20 but even that is pretty poor.

xxd09
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Re: How to Drawdown

#453395

Postby xxd09 » October 26th, 2021, 9:59 pm

Just what I did over the last 18 years of retirement -I retired at 57
Wife(teacher) was still working for the first 2 years of my retirement then retired herself with a teacher’s pension in operation
I had a SIPP as did my wife plus each of us had an ISA
I initially took the full 25% tax free cash from my SIPP and lived on that for some years while letting SIPPs and ISAs grow
Then took a lump of cash each May from ISAs to begin with and then from my SIPP -sometimes a bit from both
A few years later took the 25% tax free cash from my wife’s SIPP
State Pensions eventually appeared
All depends on the income you require
£100000 of “savings “ will produce £3000 of income per annum without reducing capital as a rough guide
Seems to work
xxd09

WindhoverDave
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Joined: October 17th, 2021, 6:38 pm

Re: How to Drawdown

#453398

Postby WindhoverDave » October 26th, 2021, 10:09 pm

Wow peeps

I don't quite understand all this but the advice points me in the right direction I think and allows me to do some research from a position of strength- I do like the idea of taking all £100,000 and stuffing £40,000 in mine and my wife's share ISAs. I'm told that my DC pension is likely to allow me to do a drawdown through L&G un the near future. So thanks very much to those who have responded to my. post. It's great that people are willing to share their wisdom. Very kind.

Kantwebefriends
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Re: How to Drawdown

#453405

Postby Kantwebefriends » October 26th, 2021, 10:29 pm

On withdrawing the full £100k of tax-free lump sum immediately: not a bad idea if you can manage to use it to fill both your 21/22 ISAs and your 22/23 ISAs, and use the rest as a sum to consume as if it were income.

On the other hand there is currently a large Inheritance Tax advantage to having your moolah in a pension rather than an ISA. This week's budget speech might change that.

Urbandreamer
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Re: How to Drawdown

#453424

Postby Urbandreamer » October 26th, 2021, 11:37 pm

Kantwebefriends wrote:On the other hand there is currently a large Inheritance Tax advantage to having your moolah in a pension rather than an ISA. This week's budget speech might change that.


As you say, many suggest that you draw from savings before pension.

Of course the assumption is that you intend to leave your kid's something, placing them financially above the state. If you do, then not using your pension currently works well, assuming that you can afford to.

Of course if you have the opinion that this will harm your kids, then it makes sense to consume the DC pension as soon as possible. Moving it to taxable accounts so that they will have to make their own money.

Many well known people have this attitude and they are far from unknown historically, even to making wills to give it away.

Ps, my question about wanting to pay tax was a question! A well known financial Journalist refuses to gift-aid money. She feels that we should all pay the tax and the government pick what is supported (rather than her or others who contribute). We all have our opinions on such, and non are wrong if they are the ones paying. Ideologically I minimise tax. So I shall be paying no income tax from the age of 60 to 65. It may be possible from 65 to 67, but I have my doubts as 65 is my DB scheme date. I'll also be drawing from non DC sources first, so that I can pass money down tax free.

ursaminortaur
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Re: How to Drawdown

#453438

Postby ursaminortaur » October 27th, 2021, 12:25 am

Kantwebefriends wrote:On withdrawing the full £100k of tax-free lump sum immediately: not a bad idea if you can manage to use it to fill both your 21/22 ISAs and your 22/23 ISAs, and use the rest as a sum to consume as if it were income.

On the other hand there is currently a large Inheritance Tax advantage to having your moolah in a pension rather than an ISA. This week's budget speech might change that.


The entitlement to take 25% of the pension tax free dies with you and your beneficiaries will, under current pensions legislation, only be able to inherit your pension tax free if you die before age 75. Thus if you didn't take the 25% tax free lump sum from the DC pension and died after age 75 then although your beneficiaries would get a larger sum they would have to pay tax on it at their marginal rate.

Hence if you think you might live to more than 75 it would make more sense to take the 25% tax free lump sum and if you wanted your beneficiaries to have it (or some of it) to gift them it during your lifetime as a PET. This would not attract any tax on the amount gifted and would escape inheritance tax if you had then survived 7 years (something more likely the earlier the gift is made).

TUK020
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Re: How to Drawdown

#453480

Postby TUK020 » October 27th, 2021, 10:01 am

Kantwebefriends wrote:On withdrawing the full £100k of tax-free lump sum immediately: not a bad idea if you can manage to use it to fill both your 21/22 ISAs and your 22/23 ISAs, and use the rest as a sum to consume as if it were income.


The other thing that may be more beneficial to fund than ISAs is your wife's SIPP, depending on when she plans to retire, her tax rate etc.
If she is still working, and a higher rate tax payer, then stuffing her SIPP as much as possible may be the best route

WindhoverDave
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Re: How to Drawdown

#453711

Postby WindhoverDave » October 27th, 2021, 8:34 pm

Yes, my wife is an interesting issue here. She's a good deal younger than me at 49, so I expect she'll outlive me - and she spent many years bringing up our youngsters so her pension isn't brilliant. She's working part-time now, bringing in circa £15,000 per annum as a school administrator, so I need to make sure there is a biggish pile left for her, rather than worrying too much about the three kids, who are all currently in full time education.

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Re: How to Drawdown

#453723

Postby Urbandreamer » October 27th, 2021, 9:53 pm

WindhoverDave wrote:Yes, my wife is an interesting issue here. She's a good deal younger than me at 49, so I expect she'll outlive me - and she spent many years bringing up our youngsters so her pension isn't brilliant. She's working part-time now, bringing in circa £15,000 per annum as a school administrator, so I need to make sure there is a biggish pile left for her, rather than worrying too much about the three kids, who are all currently in full time education.


Sounds to me like a great opportunity to find a home for that tax free cash. Ensure that she is able to contribute up to her limit into a pension. Every £100 that goes in gets an extra £25 from the government. She could, in theory, start to get it back in 8 years time. As said, it may also avoid the IHT thing.

WindhoverDave
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Re: How to Drawdown

#453864

Postby WindhoverDave » October 28th, 2021, 1:50 pm

"Sounds to me like a great opportunity to find a home for that tax free cash. Ensure that she is able to contribute up to her limit into a pension. Every £100 that goes in gets an extra £25 from the government. She could, in theory, start to get it back in 8 years time. As said, it may also avoid the IHT thing."

How do I do this??

So I take £100,000 tax free out

I put £40,000 in our two ISA portfolios.

Then what

Do I open a SIPP for my wife and stick as much as I can in there.

I don't quite understand how I can get £25 from the government for every £100 I stick in there if it is already tax free money?

Alaric
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Re: How to Drawdown

#453871

Postby Alaric » October 28th, 2021, 2:07 pm

WindhoverDave wrote:I don't quite understand how I can get £25 from the government for every £100 I stick in there if it is already tax free money?


It's automatic. You put in £ 100 and the SIPP provider collects £ 25 from HMRC a couple of months later. There are some anti-avoidance provisions around recycling pension commencement lump sums, but they don't apply in nearly all practical circumstances.

There are limits on what can be put into a SIPP. Regardless of income, everyone can put in £ 2880 which is grossed up to £ 3600. Beyond that, the genera rule is that it cannot exceed 100% of earnings from employment with a cap at £ 40,000 plus some other rules.

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Re: How to Drawdown

#453873

Postby ursaminortaur » October 28th, 2021, 2:15 pm

WindhoverDave wrote:"Sounds to me like a great opportunity to find a home for that tax free cash. Ensure that she is able to contribute up to her limit into a pension. Every £100 that goes in gets an extra £25 from the government. She could, in theory, start to get it back in 8 years time. As said, it may also avoid the IHT thing."

How do I do this??

So I take £100,000 tax free out

I put £40,000 in our two ISA portfolios.

Then what

Do I open a SIPP for my wife and stick as much as I can in there.

I don't quite understand how I can get £25 from the government for every £100 I stick in there if it is already tax free money?


Technically you give the value of her salary to your wife who lives off it rather than her salary and she then contributes her salary on which she pays tax (£15,000 gross ie £12,000 net) to a SIPP (or other pension) which is then made up to £15,000 by the government. The gift doesn't need to be recorded and isn't relevant for IHT purposes because you are a married couple (the same would apply to two people in a civil partnership).

Also this isn't recycling of the tax free lump sum since she isn't the one who received the tax free lump sum and she has just contributed money from her earnings.

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Re: How to Drawdown

#453881

Postby swill453 » October 28th, 2021, 2:33 pm

ursaminortaur wrote:Technically you give the value of her salary to your wife who lives off it rather than her salary and she then contributes her salary on which she pays tax (£15,000 gross ie £12,000 net) to a SIPP (or other pension) which is then made up to £15,000 by the government.

And for the avoidance of doubt, yes she will get £3000 tax relief even though she won't have paid anything like £3000 tax on her salary.

Scott.

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Re: How to Drawdown

#453884

Postby Urbandreamer » October 28th, 2021, 2:47 pm

WindhoverDave wrote:"Sounds to me like a great opportunity to find a home for that tax free cash. Ensure that she is able to contribute up to her limit into a pension. Every £100 that goes in gets an extra £25 from the government. She could, in theory, start to get it back in 8 years time. As said, it may also avoid the IHT thing."

How do I do this??

So I take £100,000 tax free out

I put £40,000 in our two ISA portfolios.

Then what

Do I open a SIPP for my wife and stick as much as I can in there.

I don't quite understand how I can get £25 from the government for every £100 I stick in there if it is already tax free money?


Your wife probably already is a member of a pension scheme. I'm going to assume that she earns £15kpa (like you said) and that she pays in 6% matched by her employer. These are just examples and the math can get hairy.

That would be £15k * 0.06 * 1.25 or £1,125 gross from her and £15k * 0.06 or £900 from her employer totalling £2025 gross.
Or another way to put it is that £15k * 0.06 is £900 which she is assumed to have paid tax at 20% on. £1125 * 0.8 = £900.
The maths could be different but let us assume £2025 gross.
However she could in theory put her entire salary into pensions.

If she, or you on her behalf, open a SIPP for her. Then some £12975 gross could be contributed each year that she earned the £15k.
Were you to provide £10,380 then the government would give her £2,595 (the presumptive 20% tax paid), a total of £12,975.

Pension rules limit contributions. Since your wife earns less than £40k, her salary is what limits it.
In practice you would pay a bit less in to avoid the complexity involved if you acidentaly pay more than the limit.

When she acesses the SIPP, 25% of it is tax free. So for every £100 put in she would get £31.25 tax free and £93.75 possibly subject to tax. Even assuming that she paid tax at 20% on that £93.75, which is unlikely, she would still be slightly in profit as the total would be £106.25.

Were she to retire early, say 60, and manipulate the amount of taxable income that she took to less than the personal allowance, none of it would be taxed. Leading to £125 for every £100 that you gave her.

For the sake of argument I have assumed no investment growth or administative costs.

Edit: Yes I know that she doesn't pay 20% tax on her full salary. The government however do top up personal pension contributions, regardless of tax paid. Remember, they make the rules, they don't have to be sensible rules. Even non tax payers get the top up, though what they are allowed to contribute is limited to £2880 (£3600 gross).


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