Pension Drawdown Tax Mistakes Everyone Makes (Examples Given)

In this video we look at how your pension is taxed and explore the biggest tax mistakes we see retirees make when it comes to pension drawdown. In this video we explore how your pension tax free cash works, how the crystallised or taxable funds within your pension are taxed, what the allowances are, what your personal allowance is and finally three of the biggest mistakes we see retirees mistake from not utilising their personal allowance, taking all of their tax free cash unnecessarily and not being efficient with structuring their income.

TIMESTAMPS:
00:00-02:57 How Pension Tax free Cash Works (25%)
02:57-04:33 how different tax rates work
04:33-08:00 How drawdown is taxed for basic rate and higher rate examples
08:00-12:25 3 mistakes we see with tax on pension drawdown

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I am a Chartered Wealth Manager providing independent financial planning services in the UK. I help people retire earlier, make the most of their finances, protect their families and save taxes.

DISCLAIMER:
The content in this video is provided for information and entertainment purposes. It should not be construed as direct or indirect financial advice. You must thoroughly research any potential financial or investment decision and fully understand the risks before taking it. If in doubt, you should seek Independent advice from a professional adviser. Tax rules and legislation is subejct to change. HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. The Financial Conduct Authority does not regulate tax planning. The value of investments and any income from them can fall as well as rise, and you may not get back the original amount invested. Past performance is not a reliable indicator of future performance and should not be relied upon.

[thomasmcdonald]

Another question... I’m about to start using FAD soon. If your over the old LTA which I know has been abolished for the tests parts at crystallisation and age 75 but the max tax free lump sum is still based on it would it make sense to crystallise the maximum amount to lock in the £268k. I’m above the old LTA in fund value currently but heavily invested in shares/ETFs which could fall in value back below the LTA. I don’t plan on taking much out of the pension in drawdown but I can’t see a downside to crystalising it whilst it’s above the old LTA to lock in the £268k tax free benefit. Am I missing something? The only thing I can think of is if the tax free amount became more generous later but I think that’s unlikely in the current climate.

[thehutx]

is there any way to stop your pension provider using emergency tax on your first withdraw. I'm wanting to use money to buy my council house .

[grahamwarrin]

As I understand it your calculation at 2:39 with regards to the allowable tax free cash is incorrect. The standard limit for tax free cash is £268, 275 which is based on the previous limit of £1, 073, 100 (i.e. 25 per cent of this) for DC pensions which was removed by Jeremy Hunt in one of his budgets. When you take tax free cash a percentage of this £268, 275 allowance is calculated and added to any previous percentage used so that over the lifetime of your pension withdrawals you can take up to £268, 275 as tax free cash. Not as you have the calculation based on percentages of the uncrystallised pension.

[stevendickson]

Alex. I have recently started to receive my state pension and a defined benefit pension. I took a tax free lump sum.
I am still working as a sole trader and contributing to a defined benefit pension. I wish to pay 5k above my normal contributions, which is less than 30% of my tax free lump sum. Am I able to do this without breaking any tax rules.
I would appreciate your advice.

[piperwarrior]

Don't forget every new tax year your allowance 12k..so you could take 12k of crystallised funds tax free.retire early befor state pension age.you still pay the tax but have to claim it back

[derpat]

On the tax payable example where income is £71500 them surely the calculation is:
Income - £71500
Personal tax allowance - £12500
Amount on which tax is payable = £59000
20% tax on 1st £50270 = £10054
40% tax on £8730. = £3492
Total tax payable = £13546 7:18

[thomasmcdonald]

Is there any point in paying in to a pension once a pension amount is above £1, 073, 100 and you’re a basic rate tax payer? I’m assuming not as the amount of tax free cash would already be at the maximum, and the 20% relief would be lost on the way back out?

[russellrourke]

@7:39 shouldn’t it be 125, 140? 2 x 12, 570 = 25, 140

[evilzzzability]

I will plan to withdraw £67, 026 each year from my pension while my pot is large enough- 25% tax free, £50, 270 left taxable at standard rate of which you are liable for 20% tax on £37, 700, ie £7540 in tax, for an overall tax rate of 11.25%

[watto]

If you leave some tax free cash in your pension pot is this invested along with the crystalized funds?

[silviafarfan]

You forgot to include the parenthesis in the BR and HR formulas. Big mistake. Obviously whoever does the video editing is not much of a maths whiz.

[jaspersteelhead]

Gosh, “everyone” makes these mistakes… umm that’s a bit of a click bait title.