![]() In the next phase, you might draw down another 10% of your pot (i.e. It will take around two years to reach a value of £400,000 again. Let’s say your pension also grows by 5% per year. However, because tax relief only accounts for 20% – equivalent to £3,750 – (so, half of your nominal rate of tax), you would need to claim the remaining 20% relief back via self -assessment. ![]() Perhaps you contribute £250 a month, which – if you’re a higher rate taxpayer – achieves £5,000 annually. You could take portions from your pension of £1,600 with £400 taken as tax free cash and keep the remaining £1,200 in a crystallised account.Īs long as you only withdraw your tax-free cash, you can continue to contribute to your pension up to your annual allowance. With phased drawdown, if you wanted to reduce your hours at work and needed your pension to cover a salary reduction of, say £400 per month. You could establish a regular income from the taxable portion (£300,000) If you were to retire and move your whole pot into drawdown at once, you’d be entitled to take £100,000 as a tax-free lump sum. A phased drawdown exampleįor the purposes of explanation, let’s keep the calculations simple and say that your pension pot is worth £400,000: We believe that it is beneficial to work with an pensions expert with access to a professional-level phased drawdown calculator to help you understand this option. your pension value can go up or down, and that means that the available tax-free cash changes too). Phased drawdown calculations are complex, and they involve figures that will change unpredictably over time (i.e. If you exceed this, you’ll pay lifetime allowance tax charges on the excess depending on how your income is taken. Giving your pension more time to grow increases the likelihood that you’ll reach the standard Lifetime Allowance (£1,073,100 at the time of writing).Money you’ve withdrawn from your pension can be passed on without income tax, though inheritance tax may apply if your estate is larger than £325,000.If your pension value falls over time, you’ll get less tax-free cash by withdrawing in stages than if you withdrew it all at the start. Your pension value can fall as well as rise.There are a few drawbacks to consider, such as: So, you might choose to only make withdrawals from your tax-free lump sum, which would allow you to keep up your contributions. Since you’re still working, you might want to contribute more than this, especially if your employer matches your contributions. From this point on, you can only contribute up to £4,000 to your pension (including tax relief) in any tax year. You want to continue to contribute to your pensionįinally, once you start to take an income from the taxable portion of your pension, you’ll trigger the money purchase annual allowance (MPAA). Whereas, if you wait until you no longer have that salary before taking taxable income from your pension, the first £12,570 you withdraw each year will fall within your personal allowance and be paid to you tax-free. the personal allowance), any taxable pension withdrawals you make will be subject to income tax of at least 20%. If you can get by without withdrawing anything from the taxable portion now, you might pay less tax when you do.įor example, if you’re earning more at work each year than £12,570 (i.e. Since you still have a regular income from your work, you may only need a little extra cash, and you won’t want to deplete your pension pot too much in these early years. You want to pay less income tax on your pension withdrawals Investment growth isn’t guaranteed (and your investments can also fall in value) but it is typically more likely to grow in value the longer it is able to remain invested. In this case, you may be better off leaving most of it invested, so it has the chance to continue growing. But if you’re continuing to work, you may not need all your tax-free cash now. People who are retiring completely tend to move their whole pension into drawdown, take a standard 25% tax-free lump sum, and set up a regular taxable income from the remaining 75%. There are three main reasons you might choose phased income drawdown: You want to allow your tax-free cash to grow
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