USING Pension Tax-Free Cash - YOUR Best Choice
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- เผยแพร่เมื่อ 27 พ.ค. 2024
- ⭐ MASTER CLASS SERIES ⭐
Using Pension Tax-Free Cash
Most of us know that when we come to take benefits out of a pension, we usually have the option to take some tax-free cash out of the pension scheme and drop it in our bank account.
Usually you get ONE opportunity to do this, and most people don’t think through their options carefully enough. But you’re not most people, you’re watching Meaningful Money…
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Chapters:
00:00 Welcome
00:35 How Pension Tax-Free Cash works
01:40 Factors in tax-free cash decision
02:42 Case 1 - Debt repayment
03:14 Case 2 - Shifting the balance between pension and ISA
04:49 Case 3 - Supplementing income
05:37 Case 4 - Deferring income
06:06 Case 5 - Use AVC for cash
06:55 Case 6 - Reducing income below a tax threshold
07:22 Case 7 - Enjoy it!
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📫 Leave me a comment below - I read all of them and love hearing from you!
Mapping out retirement feels incredibly perplexing at this point! With SVB, Signature Bank, and now First Republic showing signs reminiscent of the 2008 market crash and a potential recession 2.0, it raises the question: should I continue saving in US dollars or consider investing in stocks? Consequently, I'm left contemplating what 2023 holds for us as investors. Sitting on over $745K in equity from a home sale, I'm uncertain about the next steps forward.
Everyone needs a different stream of income , unfortunately having a job doesn't mean security due to the high rate of tax , one needs to move ahead their expectation, I would recommend refraining from investing in stocks for now. Instead, it would be prudent to consider retaining a portion of your assets in gold. Alternatively, seeking advice from a financial advisor could provide valuable guidance in this matter.
Do you mind sharing info on the adviser who assisted you? been saving for pension since age 18 - company scheme. along the way I hit higher tax, so I added to my company pension with a SIPP (tax benefits) I'm 46 now and would love to grow my finance more aggressively, there are a few cars I still wish to drive, a few mega holidays
I am thrilled to have this opportunity, and I am delighted to share that I have discovered the professional's website. I have wasted no time and have already contacted her by sending a message.
I am SO glad you made the point that we can think about actually enjoying a few luxuries! I am debt free, and as a lifelong motorbike enthusiast, and am planning on a vintage bike I always dreamed of. They actually can hold value well, and if I buy one that needs work, I can add value while enjoying the ride ;)
Take it and enjoy it, who knows what’s around the corner
Great work Pete. I can get my TFLS next year and am going to max it out to pay off some debts, rebalance lack of ISA and thirdly get it out before the government changes and labour come after pensions after recent changes to pensions LTA. As ever, trust no one and always get receipts!
All sounds like good sense to me!
Yes, personally I think the 25% tax free will be definitely changed.
It’s a low lying fruit so getting it sooner rather than later is a good idea.
I’m sure there will be uproar over a change but we live in a world where there are
no sacred cows.
My guess is the government robbers will reduce the tax free threshold to screw us even more.
Good luck and hope it all works out for you 👍
Labour coming after pensions? You won't need to wait that long because the current government are most likely going to ditch the triple lock that they promised to uphold in their last manifesto of commitments. Currently paying the highest levels of tax in my 44 year lifetime and they want to take even more off pensioners.
Yes, unfortunately we don't have a Conservative government.
Very good advice.
Well I asked you to make a video on DB only last week and here it is!
I intend to retire next year and will pull the trigger in April to avoid paying extra tax.
Your videos are a fantastic source of knowledge and very well and simply explained.
Many thanks Pete and much appreciated.
Great video as always Pete - many thanks.
Cheers John! 👊🏻
Thanks Pete. Great video. I'm retiring at the end of April this year and it's given me some really useful tips.
Thanks Pete, great video providing food for thought. 👍
Thank you 🙏🏻
Nice one!
Cheers!
Another great and informative video Pete, thank you. I started watching with a little intrepedation as I retired recently (Febbruary) from my full time vocation of 32 years with the same company with both DB (frozen 10 yeras ago) and DC pensions and was wondering if I had made the right choices given the options you put forward. I'm glad to say that I think I did, as I am fortunate enough to have followed through on options 2 and 5 and am living out option 7. Keep up the good work, I'll forward this one to my friends and colleagues who are nearing their 'retirement'.
good one. Thank you Pete
Thanks for watching, much appreciated! 👍🏻
Great content
I appreciate it! 👊🏻
Number 7 for us We paid off our mortgage and debt Then bought a narrowboat (we had mostly DB pensions) I did have huge problems moving my AVCs into a SIPP to me the uplift in index linked pension using the AVCs wasn’t worth it the flexibility of the money in a SIPP was more beneficial to me
This is the best video I’ve seen. Currently going to draw my pensions January next year. Had quotes from my pensions (I have 4) and have AVC’s in one of them and didn’t realise I could use that as my tax free lump some! This will give me more money per month from my pension pot. Thank you so much.
Do you have a limit on AVCs to TFLS ? In my pension it is £50000. I have no idea where that figure came from (other rules have been carried over from Government legislation, sometimes long defunct).
Not sure. However, the figure they were going to take out of the pension pot was £45k, my AVC’s value is just over £54k. I’ve actually got my pension wise phone call on Tuesday so I will ask them the question. I’ll come back and let you know.
@@MarkHarrop If there is a limit (below the 25%) it will probably be in the scheme rules somewhere. Have a good read of them.
Hey Damien, another great video, i always love watching your insight into these things. I was wondering if you could you do something on why we insist on using interest rates to deal with inflation rather than tax policy (not hust the uk it seems to be the go to policy globally). Always seems a bit like a sledgehammer to do surgery to me, or am i missing something?
Hi Pete. I have been watching your TH-cam output for a while and have always been impressed with the clarity of your explanations. I'm now on the cusp of retirement. I'm pretty sure I have enough aside in SIPPS and ISAs etc along with a modest DB scheme but I'm much less clear on best way/sequencing to take the money out and particularly the tax free part. I'm now seriously considering subscribing to meaningful academy. Am I likely to find the answers to these points in the Academy or will Voyant help me work it out?
Voyant will help you test options for withdrawing your funds, but won’t come up with an optimum solution automatically. I have a method I teach in the academy called the cash flow ladder, which we also use with clients. 30-day guarantee in the academy in case you don’t find what you’re looking for.
Love the channel. It’s rare I hear the suggestion you should take the 25% TFLS. Advisors I have encountered seem dead against it, saying it should remain invested.
All I hear about regarding pensions from colleagues close to retirement is "Tax Free Lump Sum". Not that surprising when it could easily be three or four years salary.
You can "stay invested" if you want, just put the 25% into an ISA (maybe over a few years) and bingo, you are invested (more flexible in places you want to be) and you have ready access to your money when and if you need it ...
Great content again Pete but i didnt understand scenario 3 im aware of your 12500 pa tax free option but you mentioned £16000 .my understanding was that you pay tax on anything over your tax threshold
Pete added that if you have no income. Then the total amount is tax free. £16,760 is the total amount. £4,190 is from your tax free allowance and the £12,570 is the tax personal allowance. So if you have no income then the £16,760 is free of income tax.
I received my DC pension and tax free fund and took £13830 pa including marriage allowance from drawdown topped up with the tax free cash for a couple of years paying no tax also it enabled me to give money to my two kids which is great as im around to see them enjoy it. This year I received my DB pension again taking the tax free ammount with the thought that as the DB fund would die with me as there are no guarantees in life and ive put money into a couole of ISAs then there would be some legacy should the worse happen. I am paying less tax on my pension and I have a nice little pot for new car holidays etc also again ive given the kids a bit too again. Just hope i live the 7 years for them to get full benefit. I've worked out what i need before receiving state pension in 5 years and have enough to be comfortable with so why not help them out too. Like you said ive thought it out and done what i think is right even if there are better options. It might not suit everyone but works for me.
I love that you’ve thought things out so clearly - great job!
@@MeaningfulMoney
Thanks that means a lot.
Thanks for this info - really helps me to think through my options. x
Thanks Pete great video. I am in a good position that I have not needed to access the tax free cash. But it is not widely reported that you need to consider taking it before you are 75. If you die before 75 your beneficiaries will get the pot tax free. If you die after 75 and you have not taken your tax free cash, it then becomes taxable at your beneficiaries nominal rate. So there is a good chance that it will be taxed.
Great point, Paul- thanks for making it!
Thanks Pete. I have been planning for option 5 for about 30 years now. They closed the DB scheme to accruing years in 2011, so the associated AVC pot has somewhat overshot its required target. Taking the 25% TFLS out of that seems like a no-brainer, which you seem to agree with. My big decision is how to treat the funds (and the potential tax-free cash) from the DC scheme that we were shifted onto in 2011. As the combined total value of all pensions is almost certain to break the LTA limit, would you suggest crystallising all of that, by moving it into drawdown, ahead of a Labour govmt bringing back the LTA?
Great Video Pete, Reading through the comments I have a question, both me and my wife are recurving state pension and I have DB and DC schemes with the latter still invested. I am always looking to invest any surplus cash in some sort of fixed rate savings to try and fight back against inflation so my question is this can my wife open a Sipp, is so can I give her £2880 per annum for the Sipp so she will then recieve the tax relief 20% note she only has her state pension as income so is below the personal allowance of 12570.
Thanks
I need advice whether to take tax free cash from a defined benefit scheme. I have no intention of taking a transfer value but because it's an option, advisor insists on advising on this as well and the cost of advice is prohibitive. How/where can i get advice on just cash option only.
my original thought was to pay-off all my debts and my son's university debt with the tax free cash.. if I did this and died in an accident the next year, would it be considered a taxable gift and will the taxman chase him with a bill
Useful video as always Pete. A slight aside but I recently found out that a NEST pension with a nomination is treated as being inside your estate for IHT, but an expression of wish isn’t. I’m not sure if you’ve covered this before? Cheers
That’s true of all pensions, actually. An expression of wishes is not binding on the trustees, which keeps the money out of your estate for IHT. A nomination is strictly speaking an instruction, giving the trustees no discretion. That fact alone makes pension funds part of your taxable estate. An important point which I have dealt with before - but thanks for raising it 👍🏻
Was tempted to take the tax free cash from DB due to a seemingly very good community rate. Don't need it, so would invest it. Give up £3k annually for £97k. Simplistically I'd have to live to 92 to break even.
Thinking the same myself. With the state pension at pretty much the personal tax allowance, all payments from a DB pension would be taxed every month, so the only way to get any of it tax-free is to take the lump sum.
That's a commutation rate of over 32, you would have to have a very good reason not to take 97K for giving up 3K of pension. My DB pension gives me 90K for giving up 5K.
1 option that’s not covered.
What about leaving the tax free lump sum, if you don’t need it, so that your larger / intact pension pot, continues to benefit from compounding?
Taking tax free cash is the best option for most people -]beaucse you can recycle it into ISAs and you can give it away if you are worried about inheritance tax
Thanks for the great info. With a small private pension of just 3.5k I guess the best thing to do is just take the lump sum right?
Yeah, you can take that under the small pots rules. 25% will be tax free, the rest taxable, depending on your other income.
Great video. A bit disappointed you didn't include the "Tax Free Cash" counter at the bottom corner of the screen, though... :)
I did think about it, but you know…been there, done that!
If I had one running at work last year it would have been several times a minute during any conversation about pensions. I am sure the TFLS was a big factor in "The Great Resignation".
Omg …. I wish your were my friend at the moment…. 😫😫. Divorce after 24 years… he was a bank manager so he was in control; Me now 62 😳. He 48… not big money but🤷♀️
Getting close to (early) retirement now and thinking of leaving the 25% tax free lump sum invested and taking just what I need via flexi drawdown, so I can continue to see the benefit of compound growth (fingers crossed!) 😊
Shrouds have no pockets !!!!! Spent Spend Spend (might be flippant) what happened if a future government means test the state pension !
To learn how to save and invest for the future
Great video Pete. One question if you don’t mind. I appreciate HMRC won’t allow a person to access tax free cash from their pension and invest it back into their pension (accessing further tax relief)… but is there anything to stop people investing their tax free cash into their spouses pension (if their spouse earns enough)?
Nope. No issues with that.
@@MeaningfulMoney Very helpful. Many thanks.
I got baffled after about 3 minutes
Hi Pete I'm 55 in a few months and am watching your vids and learning a lot so thankyou.
If i may ask a question, if somebody with no dependants or debts takes the 25% tax free at 55 and then upon retiring find that their combined private and government pensions come to just over the personal allowance, can that person request their private pension pay them slightly less so as to be below the personal allowance?
Thanks again for making some of this more understandable. ❤️🇬🇧
Thanks for the kind words - great to have you here!
If you choose an annuity with your private pension, then once started it cannot be changed. But most people opt for flexi-access drawdown which, as the name suggests is flexible. With FAD, you can alter the income at will.
@@MeaningfulMoney Thank you
Hi Pete. Great content - always enjoy watching. I have a question about taxation. I’ve tried looking this up but probably am not using the right ‘key words’.. When we’re working, tax is mostly taken care of by PAYE (of course we can submit a tax return). What about retirees? Often there may be pensions from multiple sources etc. I have heard passing references to ‘emergency tax’ (which I remember as being what you get taxed on PAYE prior to submitting your P45 from your last employment). How does HRMC ensure they collect any tax due on any pension drawdowns? Is there a website that explains this?
As far as I am aware the pension fund/platform will operate PAYE on your pension payments just as your employer did. Yes I anticipate that emergency tax codes will be fairly commonplace and this may well cause too much tax to be withheld under PAYE. I'm fairly relaxed about that because for those with various sources of income (as you mention) the annual complection of a tax return looks to be both likely and beneficial - so it all "comes out in the wash" once each year, fair enough.
@@roberthorsford4266 thanks. I had sort of imagined that would be the case. I guess you will be given a tax code as when working then?
I Pete great points
I right in thinking that you can pull your 25% tax free lump sum and keep it invested.
Then draw down say 12500 tax free and pull 12500 taxable pension so having 25k and not pay tax ?
Cheers G
Not really, no. Well, you can keep you cash invested but it has to come OUT of the pension pot. So you could ISA it over time, perhaps, as I mention in the video. But in order to ‘take’ tax free cash, it must come out of the pension and into your bank account.
@@MeaningfulMoney
Hi Pete
So you could Cristalize your tax free 25% draw down from that and your pension to make it work ?
This video should also include the potential impact on a DC pension tax free cash amount when a DB pension is crystallised without taking any tax free cash in order to maximise future index linked DB pension income.
However, this is all dependant on the LTA being in place or not in the future.
As an example, with the pension LTA in place, crystallising a DB pension of say £30K/yr without tax free cash would crystallise £600K (£30K/yr x 20) which is approximately 60% of the LTA.
This would then leave a maximum tax free cash amount of £100K (LTA - £600K) x 0.25 from a DC pension since there is no tax free cash above the LTA.
If you're have a decent pension, why is it so hard to borrow money for a mortgage or similar? Im looking at saving enough to retire at 60 and have an inflation adjusted withdrawal of £3k a month. With pension contributions, I only get £2500 a month now because I can put so much through the business and I have no problems living and saving etc.
Hi Pete
I want to take out my dividend payments inside my SIPP. So will the platform holder pay me minus the tax into my chosen account please?
So you’re invested and the investments pay dividends? Then yes, your pension provider may be able to facilitate that. It’ll be a moving target though.
@@MeaningfulMoney yes, try not to sell my funds just take out the dividends every quarter.
Question for you Sir.... Can I take my tax free lump sum from my pension provider and place it in my SIPP and take advantage of the four years count back?
Nope - that would fall foul of the tax-free cash recycling rules. This video explains: th-cam.com/video/ql_a2VMzAj8/w-d-xo.html&si=GUFO9LUcpb4qldoQ
Hi Pete - Meaningful Academy, what is the median wealth of your members please?
I have no idea, Clive, as I don’t see that information. I have very wealthy people in the Retirement Planning phase. I only know that because some have become clients. And in the Financial Foundations phase, there are folks just starting out with setting a budget and paying off debt
Stocks and shares ISA is almost certainly going to have lower fees and greater flexibility.
Fees will probably the same on most modern platforms. Flexibility is subjective but yes, you can take what you like with no tax implications.
ISA means you miss out on the tax relief added to a SIPP that also grows. Personally I have both, different products different usage.
My ISA will mostly be for income until my SIPP is available, then become emergency/extra funds. My SIPP is to fill the gap to my DB+state (remaining SIPP for holding inheritance).
@@The45thClown Didn't know this. I don't have a SIPP so my knowledge is patchy. Thanks 👍
My pension provider (prudential Prufund) is charging 8% to take out Tax Free cash of £100k = £8k not so ‘free’ as I thought. So get as much as you can into an ISA investment account in preference to a pension….
Hi Pete, how would you do so e rough calls to compare commuting some of your DB pension for a higher tax free PCLS, I'm offered a rate of 25 to 1, instinctively I would normally think stick with higher DB and annual increase, but at 25 to 1 it seems like I would do better when you take off the tax from DB especially ially when state pension kicks in. It's too complex a calc for me to be confident ....any tips.
Check what the annual increase will be once you start taking the pension. I have two DB schemes. The more recent will only increase a maximum of 2.5% a year once in payment (as required by |Government Legislation. There is no Triple Lock in DB pensions.
@@MrDuncl thanks Mr D, i think its 5% or rpi whichever is lower, i used 3% in excel, and i think i could do better with the cash, since extra DB would attract 20 % tax
@@DKNW62 5% is the figure in the legislation for pension earned before 2005. The bit most companies didn't cut and paste from the legislation was the footnote saying there is no reason companies can't be more generous. Maybe yours is.
Thanks again, yeah its 5%, I gues its a question of long security or flexibility.
Hi Pete Thanks for the help your videos provide BUT sorry there are still some contradictions I'm struggling to balance. 6 years from retirement, currently everything in pension and a higher rate tax payer. In one of your videos you stated one thing that makes you sigh is when people only have a pension. so as and when i have funds available i'm not also doing a stocks and shares ISA as well. However, I have not maxed out pension contribution. Have i misunderstood? should i not bother with ISA until pension allocation is maxed out? That 40% extra versus tax manouvrebility seems to be at odds with each other?
I'm now* also doing
That comment has come back to bite my a time or two! There's no substitute for the 40% tax relief - definitely favour your pension. You can always redress the balance a bit with tax-free cash when you retire.
Can I claim the 25% tax free out of all 5 pensions including two DBs and still not start the MPAA? I love the AVC option if the MPAA is not triggered
Yep, definitely. DB pensions don’t affect MPAA at all. And as long as you only take tax free cash from a DC scheme it isn’t triggered either.
Caveat. Max tax free you can take out if all of them is limited to £268k.
is the 25% tax free lump sum free from inheritance tax, ie can i gift any amount from it, to my children without it being subject to the 7 year rule?
Once you take it out of your pension and into your bank account, it is in your estate. If you subsequently give it away, the seven-year clock works like normal. It’s only tax-free cash at the point of taking it out.
Hi Pete
I am withdrawing £100k from my pension in part to be ‘the bank of mum & dad’ for a house deposit, and also to increase my cash position should markets take a tumble so as not to ‘burden’ a declining pension & investment ISA
But my question, is it normal for a provider to charge for a one of TFLS amounting to 8%? Not so ‘free’ is it!
I am with a Prudential in a Prufund
Sounds like there must be some kind of exit penalty. That’s steep though - and I’d be asking questions as to why that’s the case. You could likely transfer the pension to another provider and avoid that fee…
@@MeaningfulMoney update. It turns out the charge was from my ‘on tow’ advisor (tied to Prudential) and that the crystallisation could have been done foc myself on line or over the phone. The advisor stated categorically that it has to go via herself or the non advised application gets blocked. I am disproving this by crystallising a further smaller sum myself. Meanwhile I have put in a complaint to Prudential and needless to say her days are numbered with me. It’s the Wild West out there….
So putting my PCLS into my wife’s SIPP isn’t recycling 👍
Nope. But she would have to have the relevant earnings to justify the contribution.
@@MeaningfulMoneyI think calculating her existing annual contributions as she’s in NHS 2015 scheme might be the challenge
Some great advice and options, at what point in the year can you take your £12500 tax free allowance if you have given up work ?
Income is added up throughout the year so depends on how much you’ve earned in the year to the point at which you take pension benefits.
A very interesting video as I and a now retired colleague had opposite views with him retiring early to "enjoy" burning through his TFLS.
However, while you say DB schemes are indexed linked, both of my DB schemes have this clause copied directly from Government legislation.
"Index pensions in payment in line with inflation, capped at 5% for benefits accruing from service between April 1997 and April 2005, and at 2.5% for benefits accruing from April 2005 - known as Limited Price Indexation (LPI) (Pensions Act 1995, s51);"
That probably made sense when people were worried about deflation but with inflation out of control several of us are wondering if some of the money might be better invested elsewhere
What about using a lump sum to invest in precious metals?