Tax Allowance Planning
Pensions of all types are a great way to build up money with multiple tax breaks. Ultimately though you want to see the fruits of all that saving and take your money back out again.
The most common choice we see is pension drawdown. The rules around drawing money from a pension used to be much more complex (with rules capping withdrawals), however they have been simplified and are now much easier to understand.
There is still a lot of jargon when it comes to drawing a pension but for most of our clients, all you need to know is that you can take as much or as little from your pension as you like. You should have a quarter (25%) of the pension available to you tax-free and the rest will be added to your income and income tax deducted.
You may not be able to draw the full 25% of your pension fund tax-free if your pension fund is bigger than a certain limit (if in doubt contact us to ask).
You can take the whole tax-free amount in one go but this is often not the best option if you don’t need so much in one go. As an alternative you can draw a mix of tax-free and taxable money each month or year and use this to cover your expenditure in retirement.
The two errors we see people make with pension drawdown is taking the full tax-free cash at retirement and then investing it in a taxable account (when left in the pension it grows tax-free) and drawing too much of the balance in one go.
The default for some people seems to be to take the whole tax-free lump sum at retirement and as much of the rest as they can. Simply because it is available, and pensions are much misunderstood.
The big problem with taking a large amount of the 75% taxable element of the pension is that some of it can push into higher rates of income tax, when spreading it out over time would prevent this.
A £100,000 pension has £25,000 available tax-free and £75,000 taxable to income tax. If you withdraw the whole pension in one tax year you would pay higher rate income tax at 40% on roughly a third of the £75,000 (assuming no other income and current thresholds for income tax). Alternatively, if you drew £15,000 per year for 7 years, you might avoid tax entirely (£3,750 each tax would be the 25% tax-free and the balance would be within the tax-free personal allowance for income tax).
Most Altor clients have a much more complicated financial situation than this and so we spend a lot of time planning what capital to draw from each year to make the most of all the tax allowances available to each client.
Tax allowance planning is available to Altor clients in our Core, Discounted and Family Services.
Nothing on this website or its links constitutes a personal recommendation; the information contained is designed to be informative but not to be relied upon as individual circumstances could affect the relevance of this guidance.