Tax free allowance/pension

[HannahinHampshire]

Hi, I took redundancy a couple of years ago at age 62 and have been living off the payment plus some savings. This year, I accessed my pension, taking 25k tax free cash. I earned 2k tax year 24-25 (NHS bank admin work) but have decided the time has come to retire completely and I don’t want to work again. Tax year 25-26 I intend to take £12570 from my pension (tax free allowance) plus some tax free cash. Would it be a good idea to take 10k from my pension now as I still have this amount left in this tax year and put it in an.ISA/premium bonds? I don’t ‘need’ the money, I’m fortunate enough to have a mortgage free home, no debt and a healthy pension pot. Thank you!

DC pension or your NHS one? What do you mean by you have £10k left this tax year - is that your remaining ISA allowance?

Way too little info to go on.

Sorry, badly explained. I have a very healthy DC pension (600k +). After redundancy/early retirement I did some NHS bank admin work, I will have £100 a year pension from that! As I only earned 2k tax year 24-25 I still have 10k tax free allowance so would it be a good idea to take that from my pension and reinvest in an ISA? (I have no iSA savings at the moment).

I believe by £10k left this tax year 2024/2025, you mean the remainder of your £12,750 personal income tax allowance.

If you need the £10k to live on, I would say that is a good idea to withdraw £10k to optimise your personal tax allowance for the current tax year. I assume you are putting it in the ISA in the interim. Is it a cash ISA or a shares ISA you are planning to put it into?

Note that Rachel Reeves has just cut the amount you can save into a cash ISA each year from £20,000 to £12,000 from April 2027 whilst under 65 years. You are still within £12,000 so your £10,000 withdrawal is not affected.

I would suggest you speak to an IFA to help you to optimise your withdrawal/retirement strategy before and after state pension age. 600,000 is a healthy DC pension. Well done for getting there.

You say you took £25k TFLS, I take it this was not your full 25% TFLS?

Thank you both - no, I don’t need the 10k to live on. The 25k was not my full tax free lump sum, 100k (ish) left! I have a good IFA, will speak to him in the New Year. I have no issues with paying tax, but if I can minimize the payments well and good!

I think it’s a good idea to take the amount equivalent to your remaining personal allowance this tax year and deposit it in an ISA.

OP, good idea to speak to your IFA in the new year. You will still have 3 months before the end of the current tax year then and plenty of time to take advice and make decisions.

My only additional thought is if you don't need the 10,000 to live on to ensure that it is not just put into cash but into a vehicle/investment that can give you equivalent growth within the ISA tax wrapper as you did when it was within your pension. Your IFA will talk you through your investment horizon and risk appetite and suitable options.

Glad you have a good IFA. They are worth their weight in gold. All the best with it.

Yes this ⬆️ take your full tax free allowance every year and if you don’t need the money, reinvest it in an ISA or premium bonds.

I would question if you mean tax year 25/26 rather than 24/25, because the personal allowance is use it or lose it and the 24/25 tax year ended last april.

If you do mean 24/25 you are too late. Just because you haven’t submitted a self assessment (for example) for 24/25 yet does not mean money you take out now can be allocated to a previous tax year that has ended.

I did mean 25/26! (I tried to edit but couldn’t, has the function been removed)?

As you have taken some tax-free cash you should now have a drawdown pot with all withdrawals representing taxable income.

Just make sure you use your personal allowance on the drawdown pot and not the uncrystallised pension as this will give you 25% tax free of whatever you take out (as UFPLS or all tax-free if you take that option) i.e. £10k withdrawal would give you £2,500 tax free cash and £7,500 taxable income -using not all of your personal allowance.