Tax on taking whole of pot

[Dexydog]

Just after some advice, hoping Robert is looking in lol.
Retiring in March and thinking of taking my whole pot as a lump sum in new tax year.
Been in since 2017 whichever that is.
Currently there's 30k in there- if I take the whole lot at once what are the tax implications?
Obviously 25% is tax free, but the roughly £4500 tax I would presumably pay (20% of the remaining 22.5k) can this be claimed back as part of my annual allowance at end of 22/23 tax year or do I just have to suck it up?
No other income.
Cheers.

[RobertT]

You're in the RMDCP with Scottish Widows.

Tax is often taken off the remaining 75% once the 25% tax free lump sum has been taken, when withdrawing the whole amount from a DC pension. So you can either wait for HMRC to realise you're in line for a refund, or you can contact them earlier and tell them your situation.

Once you've got the tax back, the end result on £30k and no other income would be:

25% or £7,500 would be your tax free lump sum.
The next £12,570 would also be tax free due to the personal tax allowance.
Leaving £9,930 to pay tax on at 20%, equals £1,986 in tax.

If you don't want to pay any tax at, then withdraw the money over 2 tax years, assuming any other income you may have in the second year allows it.

[JKSmudge]

WOW ! - didn't realise it was possible to reclaim that part of it if no other income.

That may bring my retirement plans forward by a few months as I was planning to take a lump sum and bite the bullet on the 75 being taxed.

So best to leave at/near end of tax year so payment gets made in new tax year ? ( suspect it takes several weeks before payment is made.)

[Dexydog]

You're in the RMDCP with Scottish Widows.

Tax is often taken off the remaining 75% once the 25% tax free lump sum has been taken, when withdrawing the whole amount from a DC pension. So you can either wait for HMRC to realise you're in line for a refund, or you can contact them earlier and tell them your situation.

Once you've got the tax back, the end result on £30k and no other income would be:

25% or £7,500 would be your tax free lump sum.
The next £12,570 would also be tax free due to the personal tax allowance.
Leaving £9,930 to pay tax on at 20%, equals £1,986 in tax.

If you don't want to pay any tax at, then withdraw the money over 2 tax years, assuming any other income you may have in the second year allows it.

Thanks.
Slightly confused- would Scottish Widows not just take 20% tax off the remaining £22500, as they would not know my income position?
Leaving me to claim that back?
Understand about your calculation- think I was looking at it the wrong way.
If I took it over 2 years, say at 15k per year, do I only get the 25% tax free only the once?
So in this instance 1st year 3k tax free leaving 12k to tax so therefore no liability as its under 12570 free allowance.
2nd year, if only 1 amount of tax free allowed, 15k taxable minus my allowance for the second year, so roughly
I ask as I may get some employment in the second year so this may affect how I decide to take it, if that makes sense.
Apologies my understanding of this is not good, and don't get how the pension company applies the tax rules.
Thanks again.

[Dexydog]

Additionally, what would be the prudent thing if I don't need the money right away?
Best to move the risk profile to say mainly cash to protect against any stock market crash?
Noted recently the market is higher now than pre-pandemic and if wind blows the wrong way could end up on its backside again just when I want to cash in.
I'm very risk averse.

[NorthernBoy]

Additionally, what would be the prudent thing if I don't need the money right away?
Best to move the risk profile to say mainly cash to protect against any stock market crash?
Noted recently the market is higher now than pre-pandemic and if wind blows the wrong way could end up on its backside again just when I want to cash in.
I'm very risk averse.

If you are retiring in March and if you are risk adverse, i would move the whole lot into cash now, so I knew exactly what my payout would be.

The market could crash, go up, or do nothing, but if the pot of money meets your needs then make sure it’s safe.

Good luck with you retirement.

[Dexydog]

Additionally, what would be the prudent thing if I don't need the money right away?
Best to move the risk profile to say mainly cash to protect against any stock market crash?
Noted recently the market is higher now than pre-pandemic and if wind blows the wrong way could end up on its backside again just when I want to cash in.
I'm very risk averse.

If you are retiring in March and if you are risk adverse, i would move the whole lot into cash now, so I knew exactly what my payout would be.

The market could crash, go up, or do nothing, but if the pot of money meets your needs then make sure it’s safe.

Good luck with you retirement.

Thank-you.

[RobertT]

Thanks.
Slightly confused- would Scottish Widows not just take 20% tax off the remaining £22500, as they would not know my income position?
Leaving me to claim that back?

That's what I said – in a round about way.

Understand about your calculation- think I was looking at it the wrong way.
If I took it over 2 years, say at 15k per year, do I only get the 25% tax free only the once?
So in this instance 1st year 3k tax free leaving 12k to tax so therefore no liability as its under 12570 free allowance.
2nd year, if only 1 amount of tax free allowed, 15k taxable minus my allowance for the second year, so roughly
I ask as I may get some employment in the second year so this may affect how I decide to take it, if that makes sense.
Apologies my understanding of this is not good, and don't get how the pension company applies the tax rules.
Thanks again.

It depends on what you want to do! There are 2 ways:

Drawdown – you take the 25% tax free up front and then up to the personal tax allowance each year is also tax free if no other income.
UFPLS – 25% of each withdrawal is tax free, then as above.

If you Google 'difference between drawdown and UFPLS' you'll get lots of info on each option.

You'll need to contact SW and ask them of them what's possible via your current plan, or whether you'll have to transfer out to another provider.

You don't necessarily need to withdraw the money over 2 consecutive years.

I would echo the transfer to cash advice, particularly if you're going to access it all at the same time or over a fairly short period.

[RobertT]

WOW ! - didn't realise it was possible to reclaim that part of it if no other income.

That may bring my retirement plans forward by a few months as I was planning to take a lump sum and bite the bullet on the 75 being taxed.

So best to leave at/near end of tax year so payment gets made in new tax year ? ( suspect it takes several weeks before payment is made.)

Everyone has a personal tax allowance, which can sometimes vary depending on individual circumstances, but the basic rate is currently £12,570 per year.

That's how much you can earn before you start to pay income tax. Pension income counts as earnings just as wages do, apart from the 25% tax free lump sum.

If your income is lower than the personal tax allowance, you shouldn't be paying any income tax. Or if you are, you should be entitled to a refund.

Yes, it will usually be better to access your pension early in the tax year if you want to avoid paying tax, but will depend on any other income you may have.

[Schiff]

Just to add, if you take the lot as a lump sum right at the beginning of a tax year then you may initially pay more tax ass ome higher rate tax will be taken off (they assume that you will be getting £22.5K taxable income every month - in your dreams) but will still get that additional tax back.

[JKSmudge]

WOW ! - didn't realise it was possible to reclaim that part of it if no other income.

That may bring my retirement plans forward by a few months as I was planning to take a lump sum and bite the bullet on the 75 being taxed.

So best to leave at/near end of tax year so payment gets made in new tax year ? ( suspect it takes several weeks before payment is made.)

Everyone has a personal tax allowance, which can sometimes vary depending on individual circumstances, but the basic rate is currently £12,570 per year.

That's how much you can earn before you start to pay income tax. Pension income counts as earnings just as wages do, apart from the 25% tax free lump sum.

If your income is lower than the personal tax allowance, you shouldn't be paying any income tax. Or if you are, you should be entitled to a refund.

Yes, it will usually be better to access your pension early in the tax year if you want to avoid paying tax, but will depend on any other income you may have.

Thanks Robert

[ripio]

Thanks.
Slightly confused- would Scottish Widows not just take 20% tax off the remaining £22500, as they would not know my income position?
Leaving me to claim that back?

That's what I said – in a round about way.

Understand about your calculation- think I was looking at it the wrong way.
If I took it over 2 years, say at 15k per year, do I only get the 25% tax free only the once?
So in this instance 1st year 3k tax free leaving 12k to tax so therefore no liability as its under 12570 free allowance.
2nd year, if only 1 amount of tax free allowed, 15k taxable minus my allowance for the second year, so roughly
I ask as I may get some employment in the second year so this may affect how I decide to take it, if that makes sense.
Apologies my understanding of this is not good, and don't get how the pension company applies the tax rules.
Thanks again.

Drawdown is not available from Scottish Widows.
I've recently gone through the process and initially I wanted to go down the drawdown route.
At first they told me that was only possible if you had over £30k in your fund (I had just under that), then they said that drawdown was not available at all from them for the RM scheme, I would have to transfer to another provider for that.
As I didn't want to go the annuity route, I was left with the Uncrystallised Funds Pension Lump Sum (UFPLS) route which I went for.
In the end it doesn't make a lot of difference to me, just means I have to claim a series of lump sums (max two per year) each of which.comes with 25% tax free and the rest taxed which is reclaimable as I will have only minor other income.
Had my first payment recently and will be reclining the tax at end of tax year, although I believe you don't have to wait til then to do so.
It depends on what you want to do! There are 2 ways:

Drawdown – you take the 25% tax free up front and then up to the personal tax allowance each year is also tax free if no other income.
UFPLS – 25% of each withdrawal is tax free, then as above.

If you Google 'difference between drawdown and UFPLS' you'll get lots of info on each option.

You'll need to contact SW and ask them of them what's possible via your current plan, or whether you'll have to transfer out to another provider.

You don't necessarily need to withdraw the money over 2 consecutive years.

I would echo the transfer to cash advice, particularly if you're going to access it all at the same time or over a fairly short period.

[RobertT]

Drawdown is not available from Scottish Widows.
I've recently gone through the process and initially I wanted to go down the drawdown route.
At first they told me that was only possible if you had over £30k in your fund (I had just under that), then they said that drawdown was not available at all from them for the RM scheme, I would have to transfer to another provider for that.
As I didn't want to go the annuity route, I was left with the Uncrystallised Funds Pension Lump Sum (UFPLS) route which I went for.
In the end it doesn't make a lot of difference to me, just means I have to claim a series of lump sums (max two per year) each of which.comes with 25% tax free and the rest taxed which is reclaimable as I will have only minor other income.
Had my first payment recently and will be reclining the tax at end of tax year, although I believe you don't have to wait til then to do so.

Interesting info for those in the RMDCP!

In practice not all DC pension products offer drawdown, but most if not all DC pension providers do!

Transferring out is a fairly simple process and would enable those who want to take all the tax free cash up front and drawdown the remainder, to do so.