This results in the pension income being taxed at a rate of 39.2% (£11,775/£30,000). * Based on rUK income tax rates and bands (not Scotland). Using an emergency tax code, the pension income would be taxed as follows: Tax Band * Liam crystallises £40,000 in 2022/23, taking TFC of £10,000 and drawing pension income of £30,000 under flexi-access drawdown. This will give a tax free amount of £1,048 and the rest of the payment will be taxable. The emergency tax code for 2022/23 is 1257L. (Please note that different tax rates and bands may apply to Scottish taxpayers). It simply applies 1/12th of the personal allowance, basic rate and higher rate tax bands against the payment, with anything above this attracting additional rate tax. This doesn't take into account any previous payments in the current tax year. Initial income payment - emergency tax codesĬare is needed when initially going into drawdown as the first payment will often be taxed using an emergency tax code on a month one basis. The key to sustainability is only drawing what's needed, and carrying out regular income and investment reviews to ensure that they don't pay too much tax. Many savers will rely on their drawdown pot to provide an income for the rest of their lives. They may not even need it at all, preferring to leave their pension savings as an inheritance for their beneficiaries who could pay less tax, or possibly even no tax at all. Some individuals will have significant savings which gives them more flexibility in what they do with specific pension pots. Should income fall within the personal allowance, there may be no tax to pay at all. This could be at 20%, 40% or 45%, depending on the individual's total income. ![]() Income paid out under drawdown is taxed as pension income under PAYE in the year of payment. For example, someone with scheme-specific tax free cash protection will still be able to take the protected amount above the standard 25%. Unlike UFPLS, TFC from drawdown is not limited to 25% if an individual has protected cash over this amount. If it's not taken, the right to take the TFC in respect of those crystallised funds will be lost. When a part of the fund is crystallised, TFC must be taken from that part at that time (but note that no TFC is available for crystallisation events in excess of the lifetime allowance). If pension savings are likely to be made in the future, the availability of the standard annual allowance together with any carry forward allowance will mean that more can be saved without penalty. Tip - Just taking TFC without any drawdown income will not trigger the money purchase annual allowance (MPAA). The individual's age and health will be a dominant factor in this strategy. So it may make sense to pay some tax now, to reduce the overall tax paid throughout retirement. Once all the TFC has been taken, all future withdrawals are taxable income and this could mean more tax in the long term - particularly if future income is pushed into a higher tax band. But it's important to consider not just what results in the least amount of tax today, but the impact on tax due in the future. This strategy could be used in the early years until all the TFC entitlement has been exhausted. Of course, it's possible to just take TFC to meet income needs. This can allow TFC to be used to supplement income, with payments made up of a mixture of cash and taxable income. Benefits can be phased into drawdown, with TFC available each time new funds are crystallised. Up to 25% of the pension fund can normally be taken as tax free cash (TFC). However, income flexibility can also mean those who withdraw everything in one go face a large tax bill.
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