Another question... I’m about to start using FAD soon. If your over the old LTA which I know has been abolished for the tests parts at crystallisation and age 75 but the max tax free lump sum is still based on it would it make sense to crystallise the maximum amount to lock in the £268k. I’m above the old LTA in fund value currently but heavily invested in shares/ETFs which could fall in value back below the LTA. I don’t plan on taking much out of the pension in drawdown but I can’t see a downside to crystalising it whilst it’s above the old LTA to lock in the £268k tax free benefit. Am I missing something? The only thing I can think of is if the tax free amount became more generous later but I think that’s unlikely in the current climate.
Alex. I have recently started to receive my state pension and a defined benefit pension. I took a tax free lump sum. I am still working as a sole trader and contributing to a defined benefit pension. I wish to pay 5k above my normal contributions, which is less than 30% of my tax free lump sum. Am I able to do this without breaking any tax rules. I would appreciate your advice.
On the tax payable example where income is £71500 them surely the calculation is: Income - £71500 Personal tax allowance - £12500 Amount on which tax is payable = £59000 20% tax on 1st £50270 = £10054 40% tax on £8730. = £3492 Total tax payable = £13546 7:18
No easy mistake to make, you have doubled up the personal allowance. Correc tax is: £71,500 - £12,570 = £59,000 £37,700 x 20% = £7,540 £21,300 x 40% = £8,520
I’ve only deducted the tax free allowance once but this comes off total income then the balance is taxed at appropriate rate is it not? Whereas you are deducting the tax fee allowance from the basic rate tax threshold only and applying 40% tax rate on everything above this.
Don't forget every new tax year your allowance 12k..so you could take 12k of crystallised funds tax free.retire early befor state pension age.you still pay the tax but have to claim it back
Is there any point in paying in to a pension once a pension amount is above £1,073,100 and you’re a basic rate tax payer? I’m assuming not as the amount of tax free cash would already be at the maximum, and the 20% relief would be lost on the way back out?
It would make pension savings much less attractive but would still make sense if you are a higher tax payer and you are not expecting any other income that would push you into the higher tax band when you retire.
@@najib1 thanks, I will be a basic rate tax payer with no other income. I was going to pay the £2880 allowance in each year but I don’t think it makes much sense as I’d loose the tax benefit on the way back out when I withdraw. I understand the inheritance tax benefit but even that is capped at £1,073,100 so any beneficiaries if I died before 75 would be stuck having to pay tax on anything above this at their marginal rate. It seems that the tax benefit of paying in anything above £1,073,100 if one is going to be a basic rate tax payer at the point of drawdown/paying in is lost unless I’m missing something.
I will plan to withdraw £67,026 each year from my pension while my pot is large enough- 25% tax free, £50,270 left taxable at standard rate of which you are liable for 20% tax on £37,700, ie £7540 in tax, for an overall tax rate of 11.25%
You might want to think about Inheritance Tax. If your money stays in a DC pension, I believe it can transfer to your dependents tax free if you die. If you have withdrawn it, however, it could well have become part of your estate and thus potentially subject to IHT - which could be significant, if you have such a large pension pot that you are in a position to consider withdrawing £65k p.a. for several years! (If you have ISAs and other post-tax investments that are already subject to IHT, it could be better to draw on them first.) Or some combination of the two: withdraw just your personal allowance as taxable cash (plus the corresponding tax free amount, maybe) as it’s “use it or lose it”, then get most of your early retirement income from ISAs etc.
@@evilzzzability if you have a state pension you'll be pushed into the 40% tax band. I will leave some tax free cash and not take the full 25% tax free every year.
It is. Most platforms will distinguish between the uncrystallised and crystallised funds and they can be invested the exact same way or different if you wish.
@@AlexNorman-Jones I took the 25% tax free cash after listening to my FA based on my needs and plans, my colleague dident and took around 10% and then watched the market dip along with the value of the TFC. The markets have restored but for a short while he was panicking.
@@watto7728that’s one of the disadvantages of such clarity with pension schemes. We can check daily in our fund value and people can panic when markets are dipping. Pensions are long term. I have stopped the almost daily weekly check in fund value, looking maybe twice a month max.
@@guyr7351 like wise, I only check occasionally the value of my fund which as you have stated varies over time but is around the same value as when i started drawdown in 2021.
Another question... I’m about to start using FAD soon. If your over the old LTA which I know has been abolished for the tests parts at crystallisation and age 75 but the max tax free lump sum is still based on it would it make sense to crystallise the maximum amount to lock in the £268k. I’m above the old LTA in fund value currently but heavily invested in shares/ETFs which could fall in value back below the LTA. I don’t plan on taking much out of the pension in drawdown but I can’t see a downside to crystalising it whilst it’s above the old LTA to lock in the £268k tax free benefit. Am I missing something? The only thing I can think of is if the tax free amount became more generous later but I think that’s unlikely in the current climate.
is there any way to stop your pension provider using emergency tax on your first withdraw. I'm wanting to use money to buy my council house .
Alex. I have recently started to receive my state pension and a defined benefit pension. I took a tax free lump sum.
I am still working as a sole trader and contributing to a defined benefit pension. I wish to pay 5k above my normal contributions, which is less than 30% of my tax free lump sum. Am I able to do this without breaking any tax rules.
I would appreciate your advice.
On the tax payable example where income is £71500 them surely the calculation is:
Income - £71500
Personal tax allowance - £12500
Amount on which tax is payable = £59000
20% tax on 1st £50270 = £10054
40% tax on £8730. = £3492
Total tax payable = £13546 7:18
No easy mistake to make, you have doubled up the personal allowance. Correc tax is:
£71,500 - £12,570 = £59,000
£37,700 x 20% = £7,540
£21,300 x 40% = £8,520
I’ve only deducted the tax free allowance once but this comes off total income then the balance is taxed at appropriate rate is it not? Whereas you are deducting the tax fee allowance from the basic rate tax threshold only and applying 40% tax rate on everything above this.
Actually on looking at this further then I now see my schoolboy error. Apologies.
Don't forget every new tax year your allowance 12k..so you could take 12k of crystallised funds tax free.retire early befor state pension age.you still pay the tax but have to claim it back
Is there any point in paying in to a pension once a pension amount is above £1,073,100 and you’re a basic rate tax payer? I’m assuming not as the amount of tax free cash would already be at the maximum, and the 20% relief would be lost on the way back out?
Bad planning to end up in that position.
@@coderider3022 why is it bad planning? There is no LTA any longer but the maximum tax free cash is still based off what was the LTA limit
It would make pension savings much less attractive but would still make sense if you are a higher tax payer and you are not expecting any other income that would push you into the higher tax band when you retire.
Currently there is a inheritance tax benefit but this may change in the future.
@@najib1 thanks, I will be a basic rate tax payer with no other income. I was going to pay the £2880 allowance in each year but I don’t think it makes much sense as I’d loose the tax benefit on the way back out when I withdraw. I understand the inheritance tax benefit but even that is capped at £1,073,100 so any beneficiaries if I died before 75 would be stuck having to pay tax on anything above this at their marginal rate. It seems that the tax benefit of paying in anything above £1,073,100 if one is going to be a basic rate tax payer at the point of drawdown/paying in is lost unless I’m missing something.
@7:39 shouldn’t it be 125,140? 2 x 12,570 = 25,140
Good spot. You are right. I muyst have had additional rate band on my mind.
Great video anyway. Thanks
I will plan to withdraw £67,026 each year from my pension while my pot is large enough- 25% tax free, £50,270 left taxable at standard rate of which you are liable for 20% tax on £37,700, ie £7540 in tax, for an overall tax rate of 11.25%
Hi - that's an UFPLS - sounds like good plan
You might want to think about Inheritance Tax. If your money stays in a DC pension, I believe it can transfer to your dependents tax free if you die. If you have withdrawn it, however, it could well have become part of your estate and thus potentially subject to IHT - which could be significant, if you have such a large pension pot that you are in a position to consider withdrawing £65k p.a. for several years! (If you have ISAs and other post-tax investments that are already subject to IHT, it could be better to draw on them first.)
Or some combination of the two: withdraw just your personal allowance as taxable cash (plus the corresponding tax free amount, maybe) as it’s “use it or lose it”, then get most of your early retirement income from ISAs etc.
Excellent plan. I plan to withdraw £60k. £50k taxed at effective rate 11.25% and £10k from isa tax free. Starting in 3-4 years
@@porschecarreras992cabriole8You already paid tax on the money in your ISA though, so don’t forget to include that.
@@evilzzzability if you have a state pension you'll be pushed into the 40% tax band. I will leave some tax free cash and not take the full 25% tax free every year.
‘but stay around till the end’ …
If you leave some tax free cash in your pension pot is this invested along with the crystalized funds?
It is. Most platforms will distinguish between the uncrystallised and crystallised funds and they can be invested the exact same way or different if you wish.
@@AlexNorman-Jones I took the 25% tax free cash after listening to my FA based on my needs and plans, my colleague dident and took around 10% and then watched the market dip along with the value of the TFC. The markets have restored but for a short while he was panicking.
@@watto7728that’s one of the disadvantages of such clarity with pension schemes. We can check daily in our fund value and people can panic when markets are dipping. Pensions are long term.
I have stopped the almost daily weekly check in fund value, looking maybe twice a month max.
@@guyr7351 like wise, I only check occasionally the value of my fund which as you have stated varies over time but is around the same value as when i started drawdown in 2021.
You forgot to include the parenthesis in the BR and HR formulas. Big mistake. Obviously whoever does the video editing is not much of a maths whiz.
Gosh, “everyone” makes these mistakes… umm that’s a bit of a click bait title.