Drawdown for Dummies: How Can I Get Money Out Of My Pension (Guide)

[@OneAndOnlyMe]

Something else to consider. The best time to take an annuity is when interest rates are high. So if nearing retirement and interest rates are low, people should think about if they can use minimal drawdown while keeping most of the money invested, and wait for interest rates to rise and then buy an annuity. Example, an annuity bought with £350,000 would provide a decent income (about £18,000/year in today's money) to cover the basic essentials for life. I can remember when during the ultra low interest rates post 2008, £100k could only purchase an annuity of around £4,500, compared to today's 5% base rate era, where £100k can buy an annuity of £6,000.

[@Simonmoneymatters]

Hi OAOM, thank you again for your comment and for supporting the channel. Annuities are definitely more attractive when interest rates are high, so it makes sense to wait if you can afford to. Using a minimal drawdown strategy while keeping your investments growing could be considered if interest rates are low when you retire. Then, when rates rise, you can lock in a better income with an annuity. Health also plays a huge part in this decision as well as investment experience, confidence and knowledge. For those nearing retirement, it’s worth weighing the options and not rushing into buying an annuity when rates are low if you can avoid it. Our next video out on Saturday is about “How To Pay Less Tax Using Your Pension.” Please keep watching and subscribe 😊

[@jamesbulpitt9422]

Great video as always. Thanks!

[@Simonmoneymatters]

Hi James, thank you as always for your support and kind words whihc keeps us motivated to get a little bit better each week. All the very best :-)

[@hmmm5063]

Nicely presented, got a sub from me. Going to splurge your current catalog and look forward to seeing your channel grow and more high quality informative content

[@Simonmoneymatters]

Hi Hmmmm, thank you for your comment and for supporting the channel. Thank you so much for the sub and for your kind words of encouragement. We are now in out 7th month so we have a lot to learn to make each video worthy of your time. If you have any suggestions for video content, then let me know. Please keep watching :-)

[@richguest]

Many thanks for this, is there any chance to put a vid together showing the various techniques used to actually draw down from a self managed varied portfolio of ETF's, bonds, individual stocks, etc.

[@Simonmoneymatters]

Hi Rich, thank you for your comment and for supporting the channel. I have added this content idea for future videos. Each 15 minute video takes about 15-20 hours between research, charts, graphics, script, recording, video-editing, post-production, B-roll, video optimisation, publishing and thumbnails/photos. Please keep watching and subscribe and I will shout you out in the future video.

[@kjcornish3468]

I have a navy pension, which will be my main income when I retire next year at 65. I also have a small civil service pension. These 2 x sources of income will be my main incomes, plus my wife's pensions, and will provide us with enough to live on plus holidays/entertainment etc before my state pension kicks in in May 27. I do have a private pension as well, which will be around £50,000 at age 65 in Oct 25. Having listening to this video and doing other research, I am leaning towards FAD. I won't need to draw on it at age 65 so intend to leave it there, including the 25% tax free and use it to say buy a car when we need to and any other emergencies. I also have lots of other investments such as a stocks and shares ISA worth about £100,000. In your opinion, is it best to take money from my ISA/other investments before my private pension or the other way around. Another question - I am a bit confused with the difference between FAD & UFPLS. They seem similar to me.

[@Simonmoneymatters]

Hi KJ, thank you for your comment and for supporting the channel. Well done on preparing so well for you retirement and having lots of options to pick from. As a general rule, using the ISA first is better as all withdrawals are income tax-free. A pension allows 25% tax-free to be withdrawn. FAD is basically where you take your 25% tax-free cash as a larger lump sum and then all further withdrawals are taxable. Some providers allow you to take your tax-free cash in smaller chunks rather than taking it all at once. UFPLS allows you take smaller ad-hoc lump sums which are 25% tax-free and 75% taxable. For example a £10,000 withdrawal would be £2500 tax free and £7500 taxable. The balance of the fund will remain invested. Put simply, FAD allows 25% of the total fund to be taken tax-free whereas UFPLS allows 25% of the ad-hoc withdrawal to be taken tax-free. Please keep watching and subscribe ;-) Good luck and let me know how you get on 💪

[@kjcornish3468]

@@Simonmoneymatters Thank you. That explains it well enough for me to understand.

[@thomasmcdonald5542]

Good video, 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.

[@Simonmoneymatters]

Hi Thomas, thank you for your comment and for supporting the channel. First of all a huge well done in planning ahead like a champion. Crystallising now to lock in the £268k tax-free lump sum makes sense, especially since your fund is above the old LTA. The direction of travel could be lower thresholds to increase the HMRC tax revenue and not the other way around!!. Crystallising now secures the maximum benefit and gives you clarity for planning. Remember that pensions are now included in the IHT regime from April 2027. Maximising your withdrawals and paying income tax at 40% is likely to be better than leaving unused money for your beneficiaries and they have to pay 40% IHT PLUS income tax on their withdrawals which could also be up to 45% id taken as a lump sum. That would mean a double tax of up to 67%. If you are above the £2m estate value and single, thsi could be as high as 90%. Please keep watching and subscribe :-)

[@thomasmcdonald5542]

@@Simonmoneymatters Thanks Simon for taking the time to give such a detailed response, including highlighting the IHT implications from 2027. We have no children so plan to spend down the pension as well as other savings over time. Looking forward to seeing your next videos.

[@thomasmcdonald5542]

@@Simonmoneymatters just replying to this as i started using draw-down recently, although i haven't taken out as income any of the taxable cash yet. I crystallized £7,500 and took £2,500 tax free cash. My assumption that the crystallized amount would be locked in at £7,500 appears to be wrong. The £7,500 crystallized pot is fluctuating up and down as the overall value of the pension increases and decreases. I checked again and it appears your not locking anything in when you crystallize your pension and the crystallized amount will continue to fluctuate in size as your remaining un-crystallized pension increases and decreases.

[@OneAndOnlyMe]

A mistake people often make when planning retirement is in thinking about "life expectancy" (which is on average 80 years in the UK). But, the more important thing to consider is "HEALTHY life expectancy" (which is on average 63 years in the UK). Do you want to retire after your health starts to deteriorate, or before?

[@Simonmoneymatters]

Hi OAOM, I need to disagree there slightly. The ONS suggests a man aged 65 has a life expectancy of 85 and a women of 87. Healthy life expectancy may deteriorate a lot sooner - my father was age 77 before he got ill. Many fear running out of money or paying for long-term care hence a reluctance to spend money early in retirement.

[@simonroyle2806]

Im 60, at 55 I took 25% of my existing single fund tax free to pay off HMRC! so my fund became crystalised and I assumed that was all I could draw down tax free. Subsequent to that I joined an employer DC scheme and have been using salary sacrifice to accelerate this. I would like to increase the salary sacrifice to get me below the higher tax rate, that would mean my take home pay is below my living costs. So am I able to do this, but then take additional incremental tax free drawdowns to supplement my earned income (in theory upto a max of £268k tax free draw down)? I know there are the recycling rules, in my mind I would not be recycling the money but not sure if HMRC view it that way!

[@Simonmoneymatters]

Hi Simon, thank you for yor comment and for supporting the channel. You rasie a great point. Any new contributions (employee/employer) plus investment growth will be uncrystallised and will entitle you to a maximum 25% tax-fee cash on that fund value. You can use salary sacrifice/exchange to get your salary below the higher rate threshold (within annual allowance limits of £60K per tax year. If you have flexibly accessed your pension this reduces to £10K). However, you cannot take your salary to below the National Minimum Wage. You are allowed to drip-feed the tax-free cash monthly to top-up your salary and if done correctly this will not trigger the reclycling rules. Recycling rules prevent taking money from your pension tax-free and then reinvesting it into your pension for another 20% tax relief. Check with your employer and the HMRC before you action anything of course. You don't want to owe them any more after last time :-). Please keep watching and subscribe :-)

[@mark_just_mark]

Can you take tax-free cash from one pension and pay it into another pension?

[@hmmm5063]

I don’t think that’s allowed, unfortunately you haven’t found an infinite money glitch. You aren’t allowed to get tax relief on money you already got that tax relief on in another account

[@mark_just_mark]

@@hmmm5063 Okay, I thought the MPAA was in place for that but it didn’t kick in until you took crystalised funds…

[@Simonmoneymatters]

Hi Mark, thank you for your comment and for supporting the channel. If you withdraw the tax-free cash and use it as a contribution into another pension, this would be subject to annual contribution limits and potential tax implications. Pension recycling rules are designed to prevent individuals from exploiting pension tax benefits by artificially increasing their pension contributions after taking a tax-free lump sum from their pension. Please keep watching and subscribe :-)

[@mark_just_mark]

@@Simonmoneymatters Makes sense, I suppose that includes gift to spouse…

[@Arkel20001]

@@Simonmoneymatterscould you put it into a spouse’s pension?

[@OneAndOnlyMe]

Finance boffins have calculated the costs of raising the personal allowance threshold. At the extreme end, raising it to £20,000 (as Reform Ltd's pie in the sky 'contract' set out) would require additional tax raising of £270 billion to fund it. Based on that the ceiling for personal allowance threshold raising is probably going to be around £15,000, after that it's not feasible. This government could gradually raise it to £15,000 over two parliaments, this would be vote winning.

[@Simonmoneymatters]

Hi OAOM, thank you againf or supporting the channel. if the Personal Allwoance had not been frozen, it could be £15,250 in teh current tax year - this is a stealth tax until 2028 which may get extended to the end of the Government term in 2029. Our next video out on Saturday at 5pm is “80% of your success is based on these simple steps.” Please keep watching and subscribe 😊

[@abdabzeebop2]

So, say I have £100K in my pension. If I draw down 25K in a year when my earnings are over £12,560, do I pay no tax on it? What about another year, when I may only earn £8K, if I draw down £4.5K, so my annual earnings are still under the tax/NI threshold, do I still have to pay 20% tax on the 4.5K?

[@Simonmoneymatters]

HI Zeebop, thank you for the comment and for supporting the channel. If you have £100K and you take the maximum tax-free lump sum of £25K all other income is taxable. If in year 2 you earn £8K you can take £4,570 which is taxable but you're still under the Personal Allowance of £12,570 so no tax to pay - nor NI. That is a solid strategy and if you have money in an ISA - no tax to pay either. Please keep watching and subscribe :-)

[@abdabzeebop2]

@@Simonmoneymatters Thanks for clarifying that, a lot of channels gloss over that sort of thing.

[@neilbeck2455]

Is there a difference from leaving your 25% tax free in your Pension stocks & shares than withdrawing and putting in a Cash stocks and shares ISA?

[@Simonmoneymatters]

Hi Neil, thank you for your comment and for supporting the channel. Withdrawing the tax-free cash and investing in a Stocks and Shares ISA can offer more flexibility and potentially more investment options, but the ISA does not benefit from the same tax advantages as a pension. Additionally, once the money is in an ISA, any future gains are tax-free, but you also lose the protections that pensions offer, like no inheritance tax in most cases. A pension is outside your Estate for IHT whereas an ISA is inside your Estate for IHT. There is also more temptation to dip into an ISA earlier than planned. Please keep watching and subscribe ;-)

[@cragzrogers5157]

Take the whole lot out at 55 if you can,pay the tax,fill up your isa,carry on working,retire if you can at 60 or before,,, do it before the government change the rules,on everything

[@Simonmoneymatters]

Hi Crag, thank you for your comment and for supporting the channel. WOW, that is a drastic solution whch I would not recommend. You would get taxed at Month 1 tax rates and have to claim back the overpaid tax with the HMRC - reason enough not to do it :-) Saving into an ISA as well as a pension is a good idea to keep the tax-free income as high as possible. Please keep watching for the 30th October Budget where I will react to any changes and offer solutions as well. Please keep watching and subscribe :-)

[@cragzrogers5157]

@Economese the thing is this,you can take your 25% tax free,,say you have 100k pension pot take 25%,leaves 75k,you take thd whole lot,tell me if I'm wrong but you would have 60k once it is all taxed. Once you have that 60k you can filter that into your ISA, and I can put that to work and earn more than the measly 5% a year I make now after fees,also I can still work,if I draw down yearly and work I'm getting taxed more

[@richardharnwell3331]

Wowza! That might be OK for very small pension pots, but the larger they get, the worse the advice is! You could end up paying a massive amount of 45% income tax on withdrawal unnecessarily. Then, because you can only put £20K (maybe £40K if couple) into an ISA in a year, you’ll have loads of money stuck in a savings account where the interest will also be taxed, until you can gradually add a bit more to your ISAs each year. Anyone with a reasonably substantial pension pot would be massively worse off doing this. I get that it’s to avoid possible changes in the budget, but you’ll almost certainly pay far more in unnecessary taxes than you’d ever have paid because of those budget changes.

[@stevegeek]

@@richardharnwell3331100% agree. I have a decent sized pension and retired early, but I’m only taking £1.3k per month, which is completely tax free. I’m topping this up from rental income, and savings if needed. Tax efficiency is my #1 priority.

[@Nordkapp65]

​@@Simonmoneymattersthank you for your honest response. For us nearing retirement we now have to negotiate future taxes that I agree we need to consider as well as increased pension and benefits age increases.