Simple Questions on Drawdown

Including Financial Independence and Retiring Early (FIRE)
uryjm
Posts: 5
Joined: November 23rd, 2016, 9:38 pm

Simple Questions on Drawdown

Postby uryjm » January 11th, 2017, 2:43 pm

When I hit 55 I'm thinking of taking the max 25% tax free out of a DC pension pot I have.
Just a couple of simple questions:
I assume I can leave the rest of that pot untouched and still invested until the 25% free cash runs out?
If I took the 25% but also chose to drawdown 10k a year, would that 10k be taxed at the basic rate? That's assuming I wasn't working and had no other income.

I also have a DB pension. How do I estimate what the cash equivalent sitting in that currently is?

swill453
Lemon Slice
Posts: 360
Joined: November 4th, 2016, 6:11 pm

Re: Simple Questions on Drawdown

Postby swill453 » January 11th, 2017, 2:49 pm

uryjm wrote:I assume I can leave the rest of that pot untouched and still invested until the 25% free cash runs out?

Yes.
uryjm wrote:If I took the 25% but also chose to drawdown 10k a year, would that 10k be taxed at the basic rate? That's assuming I wasn't working and had no other income.

No. If you had no other income then the £10K would be encompassed within your personal allowance (£11K this year). So no tax* payable.

* - or NI for that matter.
uryjm wrote:I also have a DB pension. How do I estimate what the cash equivalent sitting in that currently is?

Best to ask them I think.

Scott.

Urbandreamer
Posts: 27
Joined: December 7th, 2016, 9:09 pm

Re: Simple Questions on Drawdown

Postby Urbandreamer » January 11th, 2017, 3:28 pm

uryjm wrote:I also have a DB pension. How do I estimate what the cash equivalent sitting in that currently is?


Definatly ask.

DB pensions don't have a constant cash equivalent. Recently transfer values have been so high that a number of well known people have decided that they are just too good to ignore.

Although generally the advice has historically been that the benefits tend to swing the decission the other way in most instances.
http://www.express.co.uk/news/uk/748732 ... ecord-high

uryjm
Posts: 5
Joined: November 23rd, 2016, 9:38 pm

Re: Simple Questions on Drawdown

Postby uryjm » January 11th, 2017, 3:31 pm

Yes, I saw that quite a few "well known" people were converting DB into DC. Seemed to me the majority were MP's or Lords and Ladies! Maybe they know something, in addition to transfer values, that we don't?
Just because I'm paranoid.....

monabri
Lemon Pip
Posts: 57
Joined: January 7th, 2017, 9:56 am

Re: Simple Questions on Drawdown

Postby monabri » January 14th, 2017, 10:37 am

urjym - just a couple of danger points to be aware of.


1 - you take the 25% tax free element.... In addition you take a further £10k which you know will be taxed....... but If you are working, the £10k will be added to your salary for the year and then taxed. So, you need to add up ALL tax incomes [including income from taxed savings/BTL income perhaps] in the tax year and ensure you don't go into 40% taxation. So, if this was in tax year 2017/18 for example, if all your earnings exceeded £45000 , then you would be taxed at 40% on the sums above £45k.

I also think that this will happen - fellow Lemons please comment!

2- When you take the £10k sum, HMRC will assume that your monthly income has suddenly increased by £10k a month and you will be put on an emergency tax code. The sum will be taxed at more than 40%. So, if you think you will get £8k after tax, the figure will be closer to £6k. Of course, you can then claim this overpaid tax back. Just be aware of this in case you need to pay an £8k bill and you only initially receive

£6k!.


3- Suggest a factor of twenty [20] to gauge the value of your DB pension. I've read recently of trade in values being ~30 times. But I would take my estimated defined pension at age 60 [or 65] and then go and look at the annuity tables. Remembering benefits such as you get a degree of inflation allowance, probably 50% passes to partner on your death. So, If your pension was £12k per year, your pot would be worth £460k (joint life 50%, 3% escalation Hargreaves at age 60.


https://www.hl.co.uk/pensions/annuities ... -buy-rates

4- I personally wouldn't/Didn't take the 25% tax free lump sum from a DB pension unless you really need to. Yes, you get a lump sum of cash but the reduction in income is marked. You would have to use the cash to generate an income of about 8% (I calculated) in equivalent. ok, there are circumstances when you might consider this but (cynically, do you think you are going to be given a good deal....)

swill453
Lemon Slice
Posts: 360
Joined: November 4th, 2016, 6:11 pm

Re: Simple Questions on Drawdown

Postby swill453 » January 14th, 2017, 11:24 am

monabri wrote:1 - you take the 25% tax free element.... In addition you take a further £10k which you know will be taxed....... but If you are working, the £10k will be added to your salary for the year and then taxed. So, you need to add up ALL tax incomes [including income from taxed savings/BTL income perhaps] in the tax year and ensure you don't go into 40% taxation. So, if this was in tax year 2017/18 for example, if all your earnings exceeded £45000 , then you would be taxed at 40% on the sums above £45k.

Well urjym did say "assuming I wasn't working and had no other income", so you're over-complicating it somewhat. No tax would be due.

However your point about emergency tax codes does have some validity. In effect the pension provider will tax the £10K at basic rate, until HMRC sorts things out and supplies the correct tax code - this will take a month or two. The tax will then be refunded automatically through the payroll and by the end of the tax year it should be correct.

Scott.

monabri
Lemon Pip
Posts: 57
Joined: January 7th, 2017, 9:56 am

Re: Simple Questions on Drawdown

Postby monabri » January 14th, 2017, 5:06 pm

Is it not the case that "if not working", then money would not be refunded through payroll - one would need to claim the refund via form Pxx (??) or via a tax return. (My wife has just been through this).

I only wanted to point out that just because you have no income at the moment because you've retired - just be careful what tax year you draw your pension in. For example, say you finished work in a February and then took your pension in March - this would all be in the same tax year even though urgym is "not working/no other income"

swill453
Lemon Slice
Posts: 360
Joined: November 4th, 2016, 6:11 pm

Re: Simple Questions on Drawdown

Postby swill453 » January 14th, 2017, 5:15 pm

monabri wrote:Is it not the case that "if not working", then money would not be refunded through payroll - one would need to claim the refund via form Pxx (??) or via a tax return.

It depends how the drawdown is taken. If £10K p.a. in monthly amounts, the pension provider will run a PAYE payroll and the tax should get sorted out.

Scott.


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