Tax efficient ways to cash in a pension fund

[DeepTalkInTheShallowEnd]

I have 3 policies/accounts/funds with Phenix Life - I cashed one in 2 years ago (~£10k) and deferred 2 (~£12k combined), the other, the third is the largest of all of the remaining 3 at ~£60k ATM, doesn't mature until 2026. We live off savings (£50k boosted by an inheritance of ~£150k), my partner's pension ~£1.5k pcm, part-time salary of £1k pcm and a very small pension that I claim ~£100pcm.

Mytax code is allow me to earn £11,300 before I need to pay tax. So cashing in a policy valued around £10k doesn't push me over the tax limit. The single fund valued at ~£60k would do - how "best" do you arrange to break that £60k down to take out say 6 lump sums of ~£10k? I've seeing terms like uncrystallised pension lump sums and pension drawdown but it's difficult to know which websites and companies to trust and contact - there are so many damn websites relating to pensions - clearly it's big business and everyone wants to to try and cash in on your pension. Where do I start? Phoenix are difficult at best to deal with - obviously I don't expect any advice from them - they are just very slow to give you information - you have to ring multiple times to get them to send you anything in writing and they often contradict themselves - I think it's down to a mix of experienced and inexperienced people working there (Glasgow/Bournemouth) - I found them to be very obstructive and their slowness to acr on my instructions to cash in one fund resulted in me deciding to defer again - I had already been provided with a "retirement pack" less that 6 weeks before I tried to cash in/commute one fund. I've really had to pester for startments and current fund values.

I'm sure what I am asking is a pretty common question - can someone point me to a good source of information so I can start planning what I will do with the remaining funds - ATM I'm not desperate for them - I don't need them to live off and I have no big plans that involve spending large amounts of money. I'm just unsure of what I am doing.

How about podcasts/YouTube to help you learn the basics of retirement planning?

Meaningful Money
The Retirement Cafe
Pension Craft

If you want to pay money into a pension, you need an earned income to get tax relief. The exemption to that is that you can put in £2880 and get tax relief on that even without an earned income.

Income from pensions, from savings, is not earned income. From what you have written I think it will be this earned income issue being your limitation when it comes to what can be paid into a pension.
There is also the MPAA - Money Purchase Annual Allowance, which triggers when you access the taxable part of a defined contribution pension. The MPAA limit is £4k so if you had earned income and had triggered the MPAA then max gross you can pay to pension is £4k.

Taking out money from pension can be done in various ways, one is called FAD - Flexi Access Drawdown and another is called UFPLS - Uncrystalised Funds Pension Lump Sum.
See if your pension provider offers either of those methods.
These enable some pension to be taken tax free and some to be taken at your tax rate. UFPLS does that without going into drawdown, whereas FAD moves crystallised money to a drawdown pot.

With FAD if you took £10k... £2.5k would be 25% tax free, £7.5 would go to the drawdown. Then taken out of drawdown at your tax rate. Your provider may offer quarterly, half yearly, annual or monthly options for paying the money out to you.

Make an appt with Pension Wise. Free independent guidance backed by government. I made an appt and found it very helpful.

www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise

Why is your tax code 1130 not 1257?

@nannymick I read it that her tax code probably is 1257 but her pension of £100 per month (£1200 per annum) reduces her available tax free earnings to £11300.

Spelt your name wrong @nannynick. Sorry!

Oh I see, you have £1200 a year of income from a pension, plus you have £12k of income from employment. Is that right?

If so then you are already in the 20% tax on any other income. If you don't need the money then you could leave it until you stop the part time work.

The £150k inheritance you may be paying tax on the interest.

Have you considered getting financial planning advice? Maybe worth paying a few £thousand to get a plan created.

If you do not need the funds I am failing to understand why you are cashing them in. You do not have to take the funds just because you reach the retirment age to which they were orgionally set up for. They can be deferred. Do you just want to cash in to put funds in a bank account? If you are unwilling to pay for advice from a financial adviser, I would book youself an apointment with pensionwise as mentioend above.

@nannynick OK thanks re:podcasts. I've not looked at them. I'm a bit confused about the discussion about putting money into a pension - why would I do that with no income bar a tiny pension (that I didn't know I was entitled to). I retired effectively at 60 last year. I have another main company pension that I can't draw yet - once again lots of problems communicating with them. I have enough to live off ATM BUT unexpected things happen in life - my partner or I could become ill or die so it might be then that I would need to know what to do.

OK you've clarified that FAD and UFPLS are different things. When I tried talking to Phoenix Life to start discussing ways to break that ~£60k fund down I was put in touch with Blackrock - once again I found them to be very unclear about what they were proposing - I didn't understand enough about the range of options that might be available and how what they did fitted in to that. I gave up trying to get clarity about management charges, costs and how everything worked. I can revisit that now I have more time to think and digest.

Tax code 1130 not 1257 - I have no idea - I logged in to the HMRC app and that's what it says.

I only have £100 pcm income from pension. My partner has £1500 pcm pension and returned to work part-time and gets £1000 pcm.

@maisie123 I did talk to Pensionwise last year but mainly about cashing in one policy which I did - they didn't really add much to what was already explained in the Phoenix life pension pack - just that commute meant cashing in. The £10k was needed for something specific - a gift to my daughter to increase her house deposit and a present for graduating and passing further exams. I didn't discuss the ~£60k fund.

@123sunshine I'm not cashing anything in ATM but - as I said above - unexpected things happen in life, priorities change and I just thought I should try and understand what I should do - well before I hot that point where I have the need to do something - I stopped working last year and really haven't got any great plans - I'm having to think up ideas about what to do with myself - I'm not into world travel, owning flashy cars and the house doesn't need huge amounts spending on it - I just have some artistic ambitions left I'm spending my time on. I will certainly go back to Pensionwise and will pay for financial advice - there just seemed to be a lot going on last year - I felt like I didn't have enough time to think about what we were doing and I wasn't sure I understood everything so I cashed in 1 policy (that was simple), deferred two others and have a third that I didn't have to make any decisions on. Literally I only decided today to start thinking about what to do. My partner has waited for 2 years for surgery and could be waiting another 1-2 or God knows how long so - going private is an option.

Paying money into a pension, getting tax relief added, then taking the money out again, using tax allowance, is a quick way of making 25% on your money. If there is personal tax allowance available, then it can be useful.

In your case I think you need to look at what tax allowance you have got. Something, probably the small pension, is using some. Part time job is probably using up the remainder, but you may not always have that job, so in years when you don't have that you have tax allowance that can be used for other things.

The part time job is his, not your's... so you have tax allowance available for use for taking money out of pensions. Keep in mind though that you want to keep the money for long term, so only take out what you actually need.

In practice you would take 25% Tax Free Lump Sum from the £12k pot.
So £3k tax free leaving £9k.

That £9k would be taxable but less than your remaining personal allowance so taxable at nil-rate (no tax to pay).

The £60k you would do similar. 25% Tax Free Lump Sum of £15k leaving £45k taxable. You would take the £45k over 4 years, £11,250 a year which is just under your remaining personal allowance.

These number tie up so neatly that I suspect this was a test :)

The longer you leave your investments to grow the better, but quality of life is important too.