Retirement – Evaluation of Your Plans

If you take any out, you need to limit it to the 25% tax free without it kicking in the limit

Whilst we’re on the subject of the 25% tax free lump, bear in mind that if you take it as a lump early on then it’s likely to end up being a lot less than 25% of the money you get from your pension fund.

it’s likely to end up being a lot less than 25% of the money you get from your pension fund

Not sure what you mean exactly but if you have a SIPP then an option is to crystallise a portion of your total fund then take 25% of that tax free. You can leave the remaining amount invested and hopefully that will grow. The remaining uncrystallised amount remains untouched and again, hopefully that will grow also. You can then crystallise a further amount and take 25% of that. You can continue to do this until you have crystallised your whole fund but in doing it in stages (possibly 1 years cash requirement at a time) then by the time you have finished, assuming some growth in your fund, then you will end up with >25% tax free cash in total.

Never had a specific plan or strategy, but we are both fortunate & higher earners, other half is in the civil service so she has a great pension & im able to max out my annual contributions along with other investments, ISA’s etc.

We both had a life before we met & we’re now late 30’s & early 40’s so we had a property each which we kept & have rented out, both with only a few years left on the mortgage & our main house is a now a pretty low LTV, so once they are done, I think we will look to make some choices with how we live.

I think realistically we could jack it all in before we got to 50 & have a comfortable life but I still have a bit of a dream of having a little place somewhere along the Ligurian coast that we can just disappear off to when we fancy it – maybe we should just stop dreaming & start doing.

I don’t see the point in living like a monk to enjoy a life over 60, my view was always a bit more skewed to living for the moment – in the last 10 years or so, work has enabled both an early finish option, without living like a monk to achieve it, which is a fortunate position to be in.

I’ve pals my age who haven’t had kids (and then grandkids) and I’ve no idea why they’re still working – they won’t be spending their wealth before they die.

Not sure what you mean exactly but if you have a SIPP then an option is to crystallise a portion of your total fund then take 25% of that tax free. You can leave the remaining amount invested and hopefully that will grow. The remaining uncrystallised amount remains untouched and again, hopefully that will grow also. You can then crystallise a further amount and take 25% of that. You can continue to do this until you have crystallised your whole fund but in doing it in stages (possibly 1 years cash requirement at a time) then by the time you have finished, assuming some growth in your fund, then you will end up with >25% tax free cash in total.

We’re basically talking about exactly the same thing, but with a slightly different perspective .  In fact I agree with everything you wrote there apart from  your >25% conclusion. In my mind it’s <25%

I have a suspicion that you’re saying it’s >25% of the total pension value at the point you take your first crystal.  I’d say that was true but not a relevant measure.

What I’m saying is that it’s <25% of the total amount you will get out of your pension.

Would you agree?

compound interest is the eighth wonder of the world

that may be, but for a pension that has a chunk invested in equities or funds it only takes a Truss/Kwarteng type snafu and a chunk of growth and even capital can disappear in an instant.

see also ‘inflation’.

that may be, but for a pension that has a chunk invested in equities or funds it only takes a Truss/Kwarteng type snafu and a chunk of growth and even capital can disappear in an instant.

Yes indeed, it would be pretty sub-optimal if that happened just before you were about to retire. The point though is that if you are invested for long enough, you will be up overall compared to cash in the mattress regardless of peaks, troughs, and inflation. All about time in the market, not timing the market…

One of the perks my company does is adding their employer”s NI to anything I put in my pension.  So far so un-mazing, but the weird thing is that they do it at the 13.8% lower ( standard?) tax rate rather than the marginal 2% rate that they are actually saving. So I save 40% tax and 13.8% NI.  Daft but handy

13.8% is correct.  Employers doesn’t  vary.  It is 13.8% on every pound above the secondary threshold calculated per period of pay (i.e. no aggregation over the tax year; it is a weekly or monthly threshold value depending on how you’re paid).

You’ll also be getting Employees NIC reductions on your payslip (just less NIC paid).  If you drop down through the thresholds you’ll be getting some relief at 2% and then some at 8%.

It’s not a kick in the teeth

What I’m saying is that it’s <25% of the total amount you will get out of your pension.

It wont be <25% of the total. The point being that by taking only some of your 25% entitlement you leave the remainder in to grow. When you take your next chunk you are taking it from a slightly larger pot. You are not getting >25% but because you are taking say 5% of your 25% each year for 5 years, and assuming the pot grows, each time you come back for another 5% it is 5% of a slightly larger amount.

Chris Bourne explains it here: https://youtu.be/AMJ8Ya3CPj4?si=PuhsGKR7n-02Jp1s

13.8% is correct. Employers doesn’t vary

Aha, thank you. I’ve had another look and I was indeed confusing Emp’ee and Emp’ee NI.  Makes sense now

Surfer, when you crystalise each of your chunks, what are you doing with the corresponding 75%?  In your post above you seem to be saying you leave it in.

I’ve always intended to take money as slowly as possible, using the 25% tax free amount as part of each withdrawal to minimise my ongoing tax bill and leave as much as possible still invested.
I’d think that unless you really need it, doesn’t make much sense to take 25% out straight away, since you then take away a huge chunk of possible future growth.

Yeah if you’ve no plans to spend the 25% pcls. Then might as well leave it in a very tax efficient wrapper.

I took the whole tax free amount out and paid for a big extension.  May not have been a bad use of it as it has increased value of house by more than I spent plus I get a nicer house to spend the next 10 years in rather than wait until I am 66 and then get it done.

So if you had a pot of say, 750k, you could take out 25% tax free, so what if you took out 40k per annum, annually, would this be tax free up to the 25% limit ?

Yes, I do have an IFA managed fund and will hopefully retire in 3 years or so age 61, but haven’t done detailed drawdown planning yet.

Surfer, when you crystalise each of your chunks, what are you doing with the corresponding 75%?  In your post above you seem to be saying you leave it in.

Yes leave it invested (you could disinvest it and leave it as cash but it remains in your sipp so the rules apply). You can only take 25% of what you crystallise so if I need £30k then I would crystallise £120k then withdraw 25% of that tax free. If my pot was, say £1m* then the remaining £880k is untouched and also remains invested. If I want another £30k I have to crystallise another £120k and so on. I can only take 25% of my total £1m pot but doing it this way each year allows the uncrystallised pot to hopefully grow, meaning the 25% is a larger amount of money but still only 25%.

*My pot is not £1m

So if you had a pot of say, 750k, you could take out 25% tax free, so what if you took out 40k per annum, annually, would this be tax free up to the 25% limit ?

IANAFA but that is my understanding and I have followed this process with my SIPP platform. So my understanding is you would crystallise £160k, withdraw £40k and leave the remainder uncrystallised. You then follow the same process in future when you want more tax free cash. I assume you could crystallise £100k the next year and withdraw £25k etc or whatever you wanted up until your whole pot is crystallised and you have withdrawn 25% of your £750k, hopefully your original £750k will have increased in value.

Thanks, I have a meeting with my IFA in a few months so this is good info for the discussion.

Alternatively 25% of everything you take out can be tax free if you don’t remove a lump sum – eg if you want 2000 per month £500 could be tax free, then the remaining £1500 would be taxable. Can continue to do that as infinitum as far as I’m aware – in this situation each time you take money out 75% of it goes into pension drawdown and the remaining 25% is tax free. Not sure exactly how it works technically, but the principle is there…!

Yeah, I had that in mind, as we are mortgage free and no need for a lump sum, thankfully.

Yes leave it invested

Exactly, so that bit continues to grow, which means that the 25% you took out ends up representing <25% of what the crystalised amount ended up as

Chris Bourne explains it here: https://youtu.be/AMJ8Ya3CPj4?si=PuhsGKR7n-02Jp1s

Count how many cubes he has on the left…..20

Count how many cubes he has on the right….6

6/26 =0.2307 = 23.1%

Would you agree 23 is less than 25?

And to quote from your video

Based on the original pension value therefore, you’ve received 30% instead of 25%

Which is what I said here:

I have a suspicion that you’re saying it’s >25% of the total pension value at the point you take your first crystal.

That’s really helpful, thanks also for the video links.

I’d heard about crystallising pots but the bricks made it make sense. I’d been looking at taking 25% out of the smaller ones, didn’t realise you could crystallise parts of a larger one to get the same effect. Crystallising parts bit by bit to get more than the 25% out tax free though – I follow the logic but sounds like a fiddle 😉  No-one tell MCTD!!

Crystallising parts bit by bit to get more than the 25% out tax free though

Your not getting >25% though its just that the 25% may be a larger cash amount. You are simply taking your 25% over a longer period. Perfectly within the rules.

Exactly, so that bit continues to grow, which means that the 25% you took out ends up representing <25% of what the crystalised amount ended up as

I didnt say it didnt. you have taken 25% of the crystalised amount at that point. That may continue to grow and you will benefit from the growth, just not tax free.

As the uncrystallised grows and you then take another 25% of whatever you choose to crystalise next, then that 25% may be a bigger cash sum. The point of it all is by staging your withdrawals you may end up with more tax free cash than if you had withdrawn the whole 25% on day 1.

I have a suspicion that you’re saying it’s >25% of the total pension value at the point you take your first crystal.

Your suspicion was incorrect but I cant be held accountable for that.

I’ve just booked a Pensionwise appointment for some impartial advice.

I’ve just booked a Pensionwise appointment for some impartial advice.

Very good idea.  My company pension provider pretty much required it when I was taking my money out.

If you are taking money out but still retaining a pension that you are paying into there are a few things to consider.

I’ve just booked a Pensionwise appointment for some impartial advice.

You won’t particularly get it from them; it’s a useful service and I absolutely recommend but they can only advise in the sense of tell you the rules, and also gave me some advice on how to check fees for my various pots, and whether any have enhanced or special benefits, etc.

But they can’t give specific ‘helpful’ advice, for that you’d need a genuine IFA.

Example as above – they could explain to you how crystallising funds works, and possibly also how that works wrt getting more (or is it less 😉 ) than 25% out tax free, etc. but in my scenario – I need to get my hands on about 10-15k in the next 0-6 months; should I just take the 25% out of the three small pots I’ve got, or take 25% out of the 50k pot, or crystallise 60k of my 300k pot and take that, or…….. I’d expect a (good) IFA to run the numbers and implications on all and then basically tell me what to do that is most efficient, not just tell me the legalities of each.

Next question is how to find an IFA. I put details into Unbiased and was very disappointed; three responses, two from remote firms that didn’t have local offices and one local but tied to a provider which I specifically said I didn’t want. So I’ve put feelers out through the local cycling club for personal recommendations, but any other tips. How am i likely to be fleeced (er, pay for) their services and what sort of cost should I expect (absolutely reflecting if they’re good they’ll make that back for you by making sure your pensions and investments perform to their best, etc.)

@theotherjonv +1 Helpful but really aimed at making sure you have considered the options and are briefed on the alternatives. It was compulsory before I liquidated some of my SIPP but I had already read up quite a lot and thankfully he told me nothing I didn’t already know. I did find my SIPP platform very useful (III) but the main source of my information is and was Youtube. Chris Bourne and Meaningfullmoney very helpful.

I’m with you @surfer, I’m not paying an IFA to borrow my watch and tell me what time it is, but I get why some people aren’t that confident and need the comfort blanket of an IFA.

Going back to the original question has anyone started training for another trade/job as they’re heading towards retirement.  Something that you can do self-employed on your own terms with a choice of the number of hours a week you work?

Fortunately, I have a decent pension but you can also earn up to £1,000 each year tax free, so I do photography gigs at cycling events which helps me fund my photography hobby.

I’m 58, no dependents, mortgage free, just need a weekly income of over £200 to top up some rental income & a part time job.

I don’t need to take any out of the pots (plenty of easily liquidated investments)

I just take the 25% out of the three small pots I’ve got,

Not specific to you @theotherjonv because I think your small pots are larger than “small pots” in the pension rules, but I’m posting this to plug a tiny gap in all the other pension scenarios that have been covered.

There are special rules for cashing out pension pots less than £10,000 (small pots rules).  You can do this 3 times only in your life for personal or stakeholder pensions and any number of times for occupational small pots.  You have to cash them out entirely as a lump sum (as long as you’re above pension age (55 now) and it terminates all benefits under that pension arrangement).

In itself, dong this isn’t a crystallisation event so it apparently doesn’t trigger the money purchase annual allowance.

For uncrystallised small pots, 25% would be tax free; 75% would be taxed at your marginal rate of income tax.  Apparently you need to have available lump sum allowance but the tax free lump sum amount is not in itself decremented from your lump sum allowance (weird rule).  If you’re instead cashing out the remnant of a pot that has had some crystallisation, the tax free amount will only be on uncrystallised portions and MPAA will already be applicable.

There is also a separate rule for “trivial commutation” which is if all your pension pots add up to less than £30,000.  This situation might occur where you’ve been running down your pots with a plan to have ongoing reliance on the state pension only in addition to non-pension sources of funding (ISAs, rentals, part time work etc.)

Because trivial commutation is a separate provision, if you have small pots, you can take them first and trivial commutation can kick in if the remaining amount is below £30000.  This means that in an extreme example it may be possible to take up to £60000 through the combination of these rules (with 25% tax free in this way) if 3x personal or stakeholder pension small pots and more if there are multiple occupational small pots.

These rules are largely in place to assist people whose occupations (moving from job to job) have resulted in a very fragmented set of pension pots building up but they constitute a weird outlier part of the pension rules that might have value in other situations.

Yes, when I say small pots, I mean pots which are smaller than the others rather than the official definition, although FWIW one is well under £10k, one is just under but with current growth will be above in a year or less (unless we let Kwasi have another go) and one is already a bit over.

FWIW; one was my first job basic pension. One is some AVCs that I took out on the advice of a FA rather than pay extra into my job pension. And the third is a nice surprise where the owner of the AVC scheme (bought up and bought up again, and I think they were investigating some oddities) wrote to me and said they thought I’d been missold. I couldn’t remember what the rationale for taking AVCs was other than that’s what the FA had said, but they sent me scans of loads of handwritten notes that I remember being shown on the 24th floor of Centrepoint, asked me if I remembered them, I said yes (pictures of umbrellas were the main prompt !) and they said that it was hard to tell if I’d known what the pitfalls were but just in case have a pension with about £11k in that they said is their estimate of the amount I’d lost.

scans of loads of handwritten notes that I remember being shown on the 24th floor of Centrepoint, asked me if I remembered them, 

That sounds familiar.  I had an AVC from the Centrepoint dudes as well.

One is some AVCs that I took out on the advice of a FA rather than pay extra into my job pension

Of course he did. All that lovely commission he trousered.

All that lovely commission he trousered.

Probably. I was 21, must have been like stealing sweets. Although – it was my first job, and I remember at least when I started I was on 12.5k per year (1990, with a degree) and I stayed 5 years. So even with pay increases, probably earned maybe £70k total and I’d be surprised if I put more than 5% so even with employer contribs, maybe 10% so £7k paid in.

And the three are now worth 30k. As others have said, the 8th wonder of the world.

I’ve just booked a Pensionwise appointment for some impartial advice.

pensionwise offer guidance. IFAs sell advice. Check out the MSE pension specials I suggested earlier in the thread. The first one makes this difference clear and gives a good idea of what to expect of guidance and of advice.

I’ve always intended to take money as slowly as possible, using the 25% tax free amount as part of each withdrawal to minimise my ongoing tax bill and leave as much as possible still invested.<br style=”box-sizing: border-box; –tw-border-spacing-x: 0; –tw-border-spacing-y: 0; –tw-translate-x: 0; –tw-translate-y: 0; –tw-rotate: 0; –tw-skew-x: 0; –tw-skew-y: 0; –tw-scale-x: 1; –tw-scale-y: 1; –tw-scroll-snap-strictness: proximity; –tw-ring-offset-width: 0px; –tw-ring-offset-color: #fff; –tw-ring-color: rgb(59 130 246/0.5); –tw-ring-offset-shadow: 0 0 #0000; –tw-ring-shadow: 0 0 #0000; –tw-shadow: 0 0 #0000; –tw-shadow-colored: 0 0 #0000; color: #000000; font-family: Roboto, ‘Helvetica Neue’, Arial, ‘Noto Sans’, sans-serif, -apple-system, BlinkMacSystemFont, ‘Segoe UI’, ‘Apple Color Emoji’, ‘Segoe UI Emoji’, ‘Segoe UI Symbol’, ‘Noto Color Emoji’; background-color: #eeeeee;” />I’d think that unless you really need it, doesn’t make much sense to take 25% out straight away, since you then take away a huge chunk of possible future growth.

Once I hit 67 and my State Pension comes in, if I’d have already taken all my tax-free cash then between the SP and all my other pensions I’d be paying higher rate income tax – I guess some of you will be the same.

Therefore seems better to retain the tax-free element and use it to reduce the future tax bill – or someone tell me I’m wrong?

No right or wrong answer and it depends on a number of factors.  The great thing is you have the flexibility to make it work in whichever way suits your needs best.