Pension draw down

[HeadFairy]

I have a very old pension from when I first started work in my early 20s (many many years ago now!) I haven’t added to it in 25 years as I’ve been with another company for 25 years and have added to their pension scheme since then. There’s only about £30k total in that old pension. With my current workplace pension and state pension and a couple of small inheritances I will be fine financially without this pension. My question is, if I draw down a small amount, what tax will I pay? I’m (just) into the higher rate income tax. I was told I can take 25% of my pension as a lump sum tax free (I’m 55) but does that mean I can take 25% of the total amount (ie £7500) tax free? Or will I only have to pay tax on 75% of whatever I take out? Someone explain draw downs to a pension dummy!

It depends if it’s a defined contribution pension, I’ll assume it is.

You’re able to take PCLS of 25% and the remainder can stay in the plan (assuming the plan has flexi access drawdown allowed).

If you take any income, it will be taxed at 40%, so I’d probably wait until you’re a non tax payer or basic rate.

PCLS is tax free

Note that if you take anything out of the pension beyond the tax free lump sum, you trigger the MPAA which means your annual allowance for pension contributions will drop to £10k.

OP we enquired about this very scenario about 2 months ago and were told not to do it due to the GaryAvisFanClub comment above.

Can pp explain MPAA and PCLS please?

MPAA https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa

PCLS- pension commencement lump sum, aka tax free lump sum.

PCLS is pension commencement lump
sum (formerly tax free cash), renamed (I think) so at any stage the government can withdraw it being tax free.

MPAA is money purchase annual allowance, once you take income (not PCLS) from a pension, you then cannot contribute more than £10,000 and get tax relief.

They are correct in a way though, taking income does trigger the MPSA, you can contribute but will not gain tax relief above £10k contributions.

MPAA not MPSA!

I have nothing to add to this discussion but just wanted to say I love your username.

There will never be a Drosselmeyer to equal our Gary!

As you were…

Very important point about limiting what you can pay into your other pensions in future. Check this first.

If you do decide to go ahead you can either:

• Take the 25% tax free as a lump sum. You don't then have to immediately start taking regular income, but if you do take income or another lump then everything after the 25% will be fully taxed at whatever your current rate is (in this case 40%, potentially 20% if wait to take it until after retirement).
• Or, spread the 25% across all your withdrawals. No lump sum up front, but every time you take money out 25% of it will be tax free and the other 75% is taxed at the relevant income tax rate.

@ProfessorBinturong

• Or, spread the 25% across all your withdrawals. No lump sum up front, but every time you take money out 25% of it will be tax free and the other 75% is taxed at the relevant income tax rate.

So if you have no income ( living off savings ) you could take £16k as a lump sum of which 4k will be tax free and the other £12k is under the tax threshold, so no income tax to pay?

Yes, that's correct.

yes that’s correct.