basic pension question

[motheroftwoboys]

I will be working until I can claim state pension at 67 and will also get my company pension then. I have a small private pension and want to drawdown some money - tax free up to 25%. Am I right in thinking that even though the lump sum is tax free I still have to be careful not to take myself over into the next tax bracket - £43K? My colleagues tell me that this doesn't matter. Who is right?

25% will be tax free even if you're on 1M a year.

Thanks Jo Jo - I know that but - say - if I earn £25K and take £18,500 in drawdown/tax free income that would take me to £43,500 - surely that would affect my tax that year?

The 25% is not taxable income, so no, it has no impact.

No need to worry - as ClashCityRocker and JoJoSM2 have said - the 25% is a tax free lump sum and is not considered taxable income so would not be taken into account when calculating the income tax you owe.

But you are right to be cautious that anything above your 25% tax free cash that you draw down is taxed as income, and therefore you would be wise to make sure that you don't take so much out that you did breach the higher rate tax threshold.

Say your uncrystallised pension pot is £74,000. You want to take maximum tax free cash (25%) so crystallise the entire pot, take £18,500 TFC and move the rest into drawdown. Any more that you take will be classed as income...... so yes, in your example above, on a salary of £25,000 if you draw down a further £18,500 you'd incur basic rate tax on £18,000 of that and then higher rate tax on the £500. This is all assuming that your personal allowance tax code is for £11k and in the current 2016/17 tax year.

It is tax free, so it is not added to your taxable income.

You will need to decide what to do with the remaining 75%, presumably you will put it into drawdown rather than buy an annuity at this stage. You may need an IFA.

Start by contacting pension wise, they will go over the basics with you face to face for free.

Another thing to watch for:
Taking only the 25% tax free is fine.
If you drawdown a PENNY more, you trigger a limit to future pension savings.

You will not be allowed to contribute more than £4000 per year to a money purchase / defined contribution pension. That might sound a lot, but if your employer contributes too, that can add up.

As it sounds like you want to access the private pension at 55 but work until you're 67, that's 12 years of your future pension where you won't be able to contribute over £4000 including employer contribution.

Make sure you get proper advice before you proceed!

Ellisandra - currently the limit for future savings is £10,000 - there is a consultation out to reduce it to £4,000 but this hasn't happened yet!

Ah, true - thanks for the correction!
But it was announced in the last autumn budget that it would happen in April 2017, and consultation on it finished a couple of weeks ago.
So although it's not a totally done deal, I personally would be acting like it is for the next 6 weeks until it's clear!