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25% tax free but leave 75% untouched and continue contributions?
Peter Sm
Posted: 12 July 2017 20:32:15(UTC)
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At age 55 I would like to take 25% tax free from my Personal Defined Contribution pension and leave 75% untouched and continue to pay 40k each year in, including employer and Gov contributions. Is this allowed? Plus could I then retire fully at 58 and put the pension pot into a dreadown scheme, obviously with no 25% tax free as this was done at age 55?
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Tyrion Lannister
Posted: 12 July 2017 20:47:08(UTC)
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Peter Sm;48806 wrote:
At age 55 I would like to take 25% tax free from my Personal Defined Contribution pension and leave 75% untouched and continue to pay 40k each year in, including employer and Gov contributions. Is this allowed? Plus could I then retire fully at 58 and put the pension pot into a dreadown scheme, obviously with no 25% tax free as this was done at age 55?
Thanks


If you take a tax free sum, you will have to crystallise your pension. This will have several consequences which you need to research yourself ( or ask a FA).

One of the consequences will be that you'll only be allowed to invest a maximum £10k pa in future according to current government rules which may be reduced to £4k as was announced in the last budget.
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Tim D
Posted: 12 July 2017 21:39:54(UTC)
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Some gov info on the MPAA (that 10K/4K limit) and the reduction: https://www.gov.uk/gover...rchase-annual-allowance
Keith Cobby
Posted: 13 July 2017 08:50:48(UTC)
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I am in drawdown and have taken the 25% tax free cash. As far as I am aware you can invest £40k per annum (max) until you start to draw an income, when it reduces.
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Tyrion Lannister on 13/07/2017(UTC)
PaulSh
Posted: 13 July 2017 09:32:28(UTC)
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I believe Keith Cobby is correct. As long as you just take your PCLS (the tax-free 25%) and don't draw any other income from it, the pension contribution rules stay the same as they were before the PCLS. It's only when you actually start to draw income that the contribution reduction comes into effect.
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Tyrion Lannister on 13/07/2017(UTC)
Catch The Pigeon
Posted: 13 July 2017 10:37:11(UTC)
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You can take your max tax free cash (25%), take no taxable income from the remaining 75% and continue to contribute £40,000 each year.

If you were to take a taxable income from the remaining 75%, you would trigger the Money Purchase Annual Allowance (MPAA) and be restricted to contributions of £10k/£4k (the law is currently unclear on this).

I'm an IFA by the way, so happy to answer straight forward questions.
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David J Robertson
Posted: 13 July 2017 11:37:35(UTC)
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Catch the pigeon, is totally correct.
That is what I am doing and works for me - not investing 40k per annum for I have retired, so my contributions are far smaller as I am in p/t work.

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Peter Sm on 15/07/2017(UTC)
PaulSh
Posted: 13 July 2017 15:29:32(UTC)
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It's being reported by The Telegraph today that the Government has confirmed that the money purchase allowance will be restricted to £4,000 a year for those who have flexibly accessed their pensions, and also that this will be applied retrospectively from April this year.
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AJW on 13/07/2017(UTC)
Tyrion Lannister
Posted: 13 July 2017 16:29:28(UTC)
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Tyrion Lannister;48807 wrote:
Peter Sm;48806 wrote:
At age 55 I would like to take 25% tax free from my Personal Defined Contribution pension and leave 75% untouched and continue to pay 40k each year in, including employer and Gov contributions. Is this allowed? Plus could I then retire fully at 58 and put the pension pot into a dreadown scheme, obviously with no 25% tax free as this was done at age 55?
Thanks


If you take a tax free sum, you will have to crystallise your pension. This will have several consequences which you need to research yourself ( or ask a FA).

One of the consequences will be that you'll only be allowed to invest a maximum £10k pa in future according to current government rules which may be reduced to £4k as was announced in the last budget.


Apologies Peter, as has been pointed out below, your annual investment allowance is only reduced after you take income.
DJ61
Posted: 13 July 2017 22:11:58(UTC)
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Apologies I am still confused. I get that that these limits only apply once you start drawing down from the 75%, but I had always thought that taking the 25% tax free only at 55 with no further withdrawals reduced the allowance to £10k. So it's still £40k until you withdraw any of the 75%?
Jon Snow
Posted: 13 July 2017 22:25:39(UTC)
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DJ61;48881 wrote:
Apologies I am still confused. I get that that these limits only apply once you start drawing down from the 75%, but I had always thought that taking the 25% tax free only at 55 with no further withdrawals reduced the allowance to £10k. So it's still £40k until you withdraw any of the 75%?


The post above by Catch the Pigeon couldn't be much clearer -

"You can take your max tax free cash (25%), take no taxable income from the remaining 75% and continue to contribute £40,000 each year.

If you were to take a taxable income from the remaining 75%, you would trigger the Money Purchase Annual Allowance (MPAA) and be restricted to contributions of £10k/£4k (the law is currently unclear on this).

I'm an IFA by the way, so happy to answer straight forward questions.
"
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Peter Sm on 15/07/2017(UTC)
Sara G
Posted: 14 July 2017 07:32:12(UTC)
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I must admit I did not know that this was possible as it could be classed as 'recycling'*, i.e. withdrawing the tax free cash then effectively putting it back in to get more tax relief on the same money. So it depends on your circumstances... if you were to maintain your regular contribution levels at, say, £500 per month you'd be fine, but if you put in an additional lump sum up to the £40K (or maximum earnings if less than £40K) limit, and this was not something you did regularly, this might attract the attention of the tax man.

*There is a factsheet on this subject on the HL FAQS page:

http://www.hl.co.uk/pens...equently-asked-questions
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Catch The Pigeon
Posted: 14 July 2017 08:16:35(UTC)
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DJ61;48881 wrote:
Apologies I am still confused. I get that that these limits only apply once you start drawing down from the 75%, but I had always thought that taking the 25% tax free only at 55 with no further withdrawals reduced the allowance to £10k. So it's still £40k until you withdraw any of the 75%?


If you are still unsure, arrange a meeting with an IFA. The benefit of their advice, should outweigh the cost.

If you are in Kent / East Sussex, then I'd be happy to offer my services.
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Peter Sm on 15/07/2017(UTC)
Alan Selwood
Posted: 14 July 2017 08:16:42(UTC)
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It just shows what a mess of complexity the whole business of pensions has become.

It all needs drastic simplification!

No laws or regulations or terms and conditions should need to have more wording than can be fitted on an A4 sheet. (Or follow the rule I've mentioned before - 'If a nine year old can understand it first time, it's too complicated').
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PaulSh
Posted: 14 July 2017 10:05:21(UTC)
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@Sara G, a regular "recycling habit" can land you in hot water too though because the recycling rules cover the tax year that the PCLS is taken, the previous two and the following two tax years. Conversely, a large single pension contribution even after taking a PCLS is fine as long as you can demonstrate that it came from another source, such as a genuine windfall payment that you have received.

And as for the annual contribution limit, it is the lower of your earnings and the £40,000 allowance but if you earn more than £40,000 in a year then you can carry forward your unused allowance from the three previous tax years in order to make a larger payment. Yet another complex set of rules because your unused allowance three tax years ago depends in part on what happened in the three tax years before that.

@Alan Selwood, it does indeed all need drastic simplification, but I fear the Government's answer to that is the LISA.
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Sara G on 14/07/2017(UTC)
David 111
Posted: 14 July 2017 13:14:54(UTC)
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Of course the annual limit is £3,600 if you have no earned income.
David Kendal
Posted: 14 July 2017 16:26:12(UTC)
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If the tax free lump sum only was drawn down in regular instalments, would this give a tax free income for a period of time?
The remaining 75% of the fund would be in the draw down account, but, if not drawn down, would this be transferrable to a beneficiary on my death and treated the same way as an uncrystallised fund for tax purposes?
Tyrion Lannister
Posted: 14 July 2017 17:53:13(UTC)
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PaulSh;48894 wrote:
@Sara G, a regular "recycling habit" can land you in hot water too though because the recycling rules cover the tax year that the PCLS is taken, the previous two and the following two tax years. Conversely, a large single pension contribution even after taking a PCLS is fine as long as you can demonstrate that it came from another source, such as a genuine windfall payment that you have received.

And as for the annual contribution limit, it is the lower of your earnings and the £40,000 allowance but if you earn more than £40,000 in a year then you can carry forward your unused allowance from the three previous tax years in order to make a larger payment. Yet another complex set of rules because your unused allowance three tax years ago depends in part on what happened in the three tax years before that.

@Alan Selwood, it does indeed all need drastic simplification, but I fear the Government's answer to that is the LISA.



On the recycling theme, is it fair to assume that if you're investing regularly into a SIPP at, say, £20,000 pa and continue to do so after taking a tax free lump sum, then the HMRC will not take issue?
Tyrion Lannister
Posted: 14 July 2017 18:00:36(UTC)
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Is it permissible to take a tax free sum in stages? Say 5% pa over a 5 year period?
PaulSh
Posted: 14 July 2017 21:13:37(UTC)
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@Tyrion Lannister,

Quote:
is it fair to assume that if you're investing regularly into a SIPP at, say, £20,000 pa and continue to do so after taking a tax free lump sum, then the HMRC will not take issue?

If you took a tax free lump sum each year then depending on the size of your contribution you might still fall foul of the rules. It must be a nightmare if you get dragged into it, but honestly I have no idea how likely that is.

Quote:
Is it permissible to take a tax free sum in stages?


You can move your pension pot into drawdown little by little and at each stage take your 25%. So suppose you have a pot of £100,000, you could move say £20,000 into drawdown each year for 5 years and take £5,000 tax free each time. But of course see the previous paragraph.
2 users thanked PaulSh for this post.
Tyrion Lannister on 14/07/2017(UTC), Tim D on 17/07/2017(UTC)
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