After a certain age is passed, the primary source of home income is the money you invested long ago. Despite the inheritance tax and other ways to reduce it, one was to invest your money in pension plans. Once you cross the minimum age number that is 55 you can easily access your pension money without being penalized. Of course, some work types demand a different number.
Let’s take a deeper look at tax implications when you withdraw a certain amount of money and look forward to different techniques that can make it possible to remove your own withdrawal money without being taxed.
Pensions are a robust tax shelter. In other words, you get tax-free contributions into your pension bag, and any growth in your pot is free from capital gains tax or any additional tax. As a UK resident, you can contribute up to £40,000 per annum in the current tax year for a tax-free pension pot. According to 2021-2022, there is also a lifetime allowance of up to £1,073,000.
On the whole, there are two most common effective ways you can draw down from your pension pot. You have to reach the minimum retirement age, which you guessed correctly, i.e., 55
- You can take a lump sum of 25% tax-free
- You can buy an annuity –a regular income for your remaining life.
At first, you used to withdraw money under the strict influence of the government, but now people have more freedom to draw down their tax money. As a pension saver, you can control your tax bills by making controlled and managed pensions withdrawals in some tax years compared to others. Keep track of your pension withdrawal and drawdowns. It will help you to reduce your tax bills effectively.
“As a pension saver, you can control your tax bills by making controlled and managed pensions withdrawals in some tax years compared to others.”
When you reach the minimum requirement, you can transfer the money of your desire into Flexi access drawdowns. Let us suppose that you pay tax at 40% and have got 56 years of your age. As a higher rate taxpayer, you pay taxes at 40%, and you have a pension pot worth £250,000.
You are thinking of withdrawing £10,000 without paying tax. As you have passed the age of 55, you can transfer your £40,000 into a Flexi-access drawdown plan and take 25% of this invested £40,000 as a tax-free amount that equals £10,000. Now remaining £30,000 are left into your Flexi-access pot without taking an additional taxable income. So you see, you have withdrawn your desired £10,000 wisely without paying a single pound as a tax.
“Your Flexi-access pot can be used without taking an additional taxable income.”
You can decide to transfer another handsome amount into Flexi-access and withdraw 25% of its tax-free, leaving another certain amount into your drawdown pot. The drawdown plan will allow you to take out a lump sum of tax-free money without any additional taxable income. For taking advantage of this scheme, you have to look for that your tax providers allow you to access this scheme or not. If your tax provider does not immediately talk to a tax expert like Legend Financial, that will help you in different ways regarding the project.
UFLPS stands for Uncrystallized Funds Pension Lump Sum. UFPLS is similar in how it works to a Flexi-access drawdown, but obviously, there is some difference in both of them. Let’s again take the above example when you were 55 and wanted to take £10,000 without paying a single pound as tax, so you shifted your £40,0000 into UFPLS and made a withdrawal of 25% of it as tax-free money.
Up till here, there is no difference in both schemes. The fundamental difference arises due to the remaining £30,000 how they are treated! In UFPLS, the reaming money has to be taken as a taxable income. You can’t invest it in a Flexi-access drawdown plan. So as you were a 40% taxpayer, you made a cash withdrawal of £40,000, and you will be subjected to £12,000 as income tax. This seems to be a colossal wound to your pension pot. So it can be clearly understood why time is crucial to minimize your tax bills?
“In UFPLS, the remaining money has to be taken as a taxable income.”
MPAA stands for the Money Purchase Annual Allowance. As you have crossed your minimum age requirement, but you’re still working, you can get access to MPAA. From 6th April 2017, the money purchase annual allowance was reduced to £40,000 per annum. After crossing your minimum age requirement, you can still contribute to your pension pot and make it larger by investing £4,000 gross per annum. This compares to the usual 40,000 tax-free contribution allowance.
“After crossing your minimum age requirement, you can still contribute to your pension pot and make it larger by investing £4,000 gross per annum.”
Small limited companies can take a loan from their pension pot. If you are running an XYZ limited company, you can set up a pension scheme like SSAS –a small self-administrated scheme. This defined contribution scheme is typically established by owner directors of small limited company businesses. Such types of projects are very much common in family-oriented businesses capped at 11 individuals.
One of the advantages of SSAS that it allows more independent management of it as a pension scheme compared to traditional occupational pension schemes. This scheme can provide you a commercial loan to a tax-free company to purchase an asset.
“This scheme can provide you a commercial loan to a tax-free company to purchase an asset.”
The traditional way to access your money in the pension pot was by buying what is termed as an annuity. You utilize your pension pot to purchase a guaranteed lifetime income. Let’s again suppose that you are 60 and have £250,000 in your pension pot.
You withdraw 25% of it, which comes out to be £ 62,500 tax-free money. On the remaining £187,500, you choose to buy an annuity –a lifetime income from the insurance company. The rate is 0.1% now. The grant is a fair idea allowing retirees to put money altogether. The most significant advantage of an annuity is that it is for a lifetime.
A lot more strategies can be adopted to withdraw you saved many tax-free. Incorporating your money in birthright tax and avoiding the tax by investing in pension opens a door for tax on pension withdrawal. You can adapt the steps mentioned earlier to reduce the next welcoming scissors.
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