How TAX FREE CASH works? And 3 EXAMPLES of how it can be taken from your PERSONAL PENSION!

Chartered Financial Planner based in the UK.
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How TAX FREE CASH works? And 3 EXAMPLES of how it can be taken from your PERSONAL PENSION.
Just to try and show the practical ide of how TAX FREE CASH works with 3 examples of how you can take it from your PERSONAL PENSION.
Also, I show an example of how the tax bands work in relation to your taxable pension income.
Link to the Government Money Helper Website:
www.moneyhelper.org.uk/en#
🗒 Please note:
The information provided is based on the current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on my understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances.
This channel is for information and education purposes only. Any information or guidance given does not act as financial advice. Please consult a financial adviser if you are unsure in anyway.
Keep in mind that the value of your investments can go down as well as up, so you could get back less than you invest.
⭐ My aim is to provide education and guidance to help individuals understand pensions, investments and protection.
#ukpensions #retirementplanning #taxfreecash

[@EdmundBaileyUK]

Thanks for watching!! 🙏 Please let me know if you have any questions.

[@richardlincoln886]

Nice and clear, I think I understand as follows: - UPFLS pulls the full amount inc. 25% tax free direct into your current account - taxed en-route. (Your first vertical slice scenario) - Drawdown pulls the amount inc. 25% tax free into drawdown 'account' 'crystallised', then you take an income like payroll from the DD portion. (Your pie chart scenarios) Qs For the DD scenario When is the tax paid - on entry to drawdown or as you take funds from it into your current account (I thought the latter) - but how does the tax man know how much of the DD account is tax free? i.e. When into the pension there will be relative random fund movement from the DC to crystallised, then from crystallised into current account- how is the tax man (and me) keeping track of which parts are tax free. Cheers.

[@nightowl8352]

Great one as always.Many thanks

[@EdmundBaileyUK]

Thanks Night Owl!

[@thomasboyd2733]

Awesome. Excellent channel. Spot on. Well said.

[@EdmundBaileyUK]

Thanks!! 🙏

[@blackmac1970]

Thanks for the explanation. The diagrams really help.

[@EdmundBaileyUK]

Thanks MacLaggan!!! Appreciate that! 🙏🙏

[@abmaddison]

I’d be interested in seeing a video where you discuss the practicalities of drawdown methods with regards to tax codes, i.e. lumps sums vs monthly, and how that affects the tax deducted, and when you need to claim back tax. And how this relates to UFPLS vs FADD. Keep up the good work making quality content!

[@MrWkdWilly]

Brill, I’m 59 and just taken voluntary redundancy, think I’d better get in touch for a chat!

[@scottford5870]

Another great video Edmond, every little helps 👍

[@EdmundBaileyUK]

Thanks so much Scott!! 🙏🙏

[@FrankMike2012]

Thank you very much Edmund- another very interesting and very helpful video. I haven't been working for quite some time now but have about 100K pot so it sounds like I could take 10K (part tax free and part taxable) each year without paying any tax at all as I have my full personal allowance each year to 'take care' of the taxable bit. If I've got that right, then that sounds like the most tax efficient way of using the pot. So long as I've got that right, then you may just have saved me thousands of pounds! Fingers crossed and thanks again.

[@EdmundBaileyUK]

Thanks so much Michael and yes if it falls within your personal allowance then no tax should be payable. If taken either as lump sums or as an income then it’s likely you’ll overpay tax and then have to reclaim. If done as lump sums then you’ll need to use P55 or P50Z. As an income it’ll be emergency tax then adjusted for subsequent income payments.

[@TheBubblewrapboy]

Great video explanation, exactly what I wanted to confirm .👍

[@EdmundBaileyUK]

Thanks!

[@craigmillan6044]

I find your videos to be really well explained. There is one question you never answer in your scenarios and I can’t find an answer on KZbin and Google. You often talk of growth after taking money out your pension. We understand this to be investment growth. But can you make further contributions after taking money out? How much and does that differ for reasons? I’ve heard of £4K, £10k and unlimited contributions. Which is right? Please do an episode on this as people will need money (especially right now) but do not want to lose the tax advantage of paying in tax efficiently. You may be 55, need money, and plan to work for 12 more years by example. Thanks.

[@nigh3132]

ALWAYS great content...? If I decided to take 5% of my tax free allowance, how long will that actually take to get into my bank? In other words how much notice would I have to give to my pension provider...?

[@EdmundBaileyUK]

Thanks! Although I am hoping it’s an explanation mark rather than a question mark… unfortunately this is entirely provider and scheme specific. Modern and well run pensions it could be a case of a few days in other cases I have seen weeks.

[@FrankMike2012]

Edmund, just a further thought if I may....is it possible to take 'vertical' slices out of the pot and then at a future date, buy an annuity with the rest (and does the 'rest' have to be uncrystallised?). Thanks again for shining a huge light on all of this!

[@EdmundBaileyUK]

Absolutely, if there are funds remaining in the pension whether crystallised or uncrystallised then that can be used at any point in the future to buy an annuity. This is fairly common in someone will use drawdown for a number of years and then buy an annuity with some or all of the fund a couple of decades later.

[@kevincarpenter3428]

Great video series,could you advise me,my frozen aviva workplace pension is worth 40 000 pounds. They tell me that it's worth 900 a year when I reach 65 in 2035.so to my mind they are saying they expect me to live till I'm 110.am I missing something?

[@huggybear1]

Thanks for the clear explanation. As I understand it if your taxable element of your pension withdrawal is below £12,570 you don’t pay any tax as this is below your personal income, assuming you don’t have any outside income apart from this pension withdrawal? Also one follow up; if this is the case do the pension company automatically take the tax at the withdrawal stage or do you have to declare it on a tax return to pay any tax that maybe be due? Thanks.

[@ryanjames2962]

On the first part YES, I believe the it needs to go through tax return in answer to the second part... As a small expansion to the answer of the first part though, you could actually take out £16,760 and pay no tax... 25% tax free of £4,190, then the remaining 75% of £12,570 would be "taxable", but due to the fact that this is also the value of your tax free allowance you would NOT pay on tax on that. hope that makes sense...

[@huggybear1]

@@ryanjames2962thanks Ryan. So it would make sense to withdraw the £16760 as you would pay no tax every year then put any surplus cash back into the pension (£4k limit I believe) or ISA? Again assuming you have no other taxable income.

[@davebeef2001]

Thanks Edmund. Assuming you have no other income what is the maximum you can withdraw per year from your pension fund (including tax free cash) before having to pay any tax whatsoever. Due to retire at 55 shortly and have minimal outgoings. Thanks.

[@EdmundBaileyUK]

Thanks William. Technically that would be all of your tax free cash plus £12,570 of taxable income before any income tax is payable.

[@davebeef2001]

@@EdmundBaileyUK Thanks. I suppose using UFPLS withdrawals I could crystallise and withdraw yearly the figure which when 25% is removed will equal the tax threshold. In the region of £16k or so.

[@EdmundBaileyUK]

Thanks William, yes in that respect as an ufpls it’s £16,760, of which 25% is tax free cash, £4,190 leaving £12,570 of taxable income.

[@MartinHopkinson]

Ed, you didn’t use the term but are these examples Uncrystallised Funds Pension Lump Sums (UFPLSs)? On the subject of taxation, I assume that these lump sums will be taxed either with an emergency code or, even if the pension company has a tax code, as if they were to be an ongoing monthly withdrawal. If that’s true, is the appropriate reclaim form P55 and is it straightforward to make the claim? (I have Government Gateway access and a tax account).

[@EdmundBaileyUK]

Thanks for the question Martin. Yes technically the option 1 would could also be referred to as UFPLS. Where you are taking the tax free cash and taxable element out the pension as a lump sum. And yes this would likely be taxed at the emergency rate of tax and form P55 would be used to reclaim tax if you don't have employment income.

[@MartinHopkinson]

@@EdmundBaileyUK Thanks Ed. That’s very useful to know as my wife is planning to use UFPLS to make full use of her personal allowance before she starts to receive her State pension.

[@jonsmyth8353]

Great useful video as always Edmund. Quick question if I may. If I have an ISA say £100k , can I buy a pension product with this ? If I can and it pays say £4k per year would this income be taxed? Assuming im currently employed with a £40k salary . Thanks you for your answer in advance.

[@EdmundBaileyUK]

Thanks Jon. Unfortunately the answer is complicated in that yes you can do that but you would be the ISA to pension would be a pension contribution and you would be restricted by annual allowance and carry forward. The question is then is it beneficial to make a pension contribution for the very different tax treatment that you would have under a pension vs the ISA. It’s a ‘it depends’ on your personal position, tax position and ultimately your objectives with the money. Sorry for the fence sitting.

[@paulgoodridge2494]

Can you go the other direction and withdraw only from the taxable area?

[@EdmundBaileyUK]

Thanks Paul and no you cannot, tax free cash comes before or at the same time as the taxable element. But you cannot take the taxable element first before the tax free cash.

[@MartinHopkinson]

Ed, your latest video (drawdown 3 ways) is showing as private so I can’t watch it. I’m not sure why but are you aware?

[@EdmundBaileyUK]

Thanks Martin!! I had some tech issues with the upload and have had to upload it again! Thanks for flagging it! 👍👍

[@bazfautley]

Thanks for that Ed. A good clear explanation. Am I right in thinking that if I have a taxable income of say £7000, I can use UFPLS to withdraw funds from my pension to take full advantage of the tax free income. For example, my tax free income level is £12570. If I take of the earned rental income of £7000 from that, it leaves me with £5570. I can therefore withdraw £5570 + £1856.67 (20% tax free element allowed from the pension drawdown) from my pension, giving a total effective tax free income of £14426.67

[@presterjohn71]

Another useful video so thanks for that, however how you do your 5s is the work of the devil! 😂

[@EdmundBaileyUK]

😂🤣 my hand writing is terrible… especially when fast!!

[@duttontube]

Hi Ed, not sure I understood your examples. You started with a 100k pot, and then seemed to move into a 40k pot with drawdown scenarios based on this. I didn’t see the scenario of the original 100k pot. Maybe I missed something? Also - the state pension only kicks in after 67, so the initial drawdown at 55 or 57 would assume you’re still working, not taking state pension?

[@EdmundBaileyUK]

Thanks James for the comment James. Sounds like I should have used better examples. The 3 examples I use are to show how £10k of income could be obtained from the personal pension, so in the £40k example you’d need to crystallise £40k out of the £100k to obtain the £10k of tax free cash. That would mean £40k had been crystallised and £60k would be uncrystallised… I’ll have a think if there is a better way I can explain it. And you are correct in regard to the state pension. It was more of a generic example of how the tax bands work with taxable income. I think I need to go back to the drawing board to see how i can present this stuff a bit better. Thanks again for the comment and feedback. 🙏

[@ivanbalabanov5816]

Hi Edmund, I agree with you and James. It's good, but it's not good enough. You are right to say that you should return to the drawing board for clearer and easier-to-understand explanations. I don't think you also need to simplify the sampling when you do calculations - 10% of 90,000 is 9,000. Also, as many of us expect and know, the income from the money left in the pot may decrease - in which case what is better? To pull more? Download everything and invest elsewhere? Lastly, how many times can I pull lump sum from the pot in my life. Thanks again - you channel is really important for many of us!

[@mal8441]

I have withdrawn my pension of £15,178 and still waiting for it to be paid into my bank account, but I've been told 75% will be taxed before it reaches my account, what can I do to reclaim the tax back thanks.

[@EdmundBaileyUK]

Thanks Mal, yes unfortunately emergency rate tax is applied to one off or the first pension income payments. The tax can be reclaimed either via self self assessment or via forms P50z or P55.

[@jameshindle2609]

@@EdmundBaileyUK Thanks Edmund I have claimed a pension payment before from the people's pension. This is from a Avc pension planI have with Zurich insurance. It is taking 22 days to process and I have been told it could be longer. Is there a time limit in which they have to process a claim and then payout thanks Malcolm.

[@johnristheanswer]

Well structured and clear instruction for a Private Pension. What is your view on an NHS pension. Retiring in 4 years time. Pot approx £400k. Is it better to take £100k Tax Free and reinvest it ' safely ' , say in an ISA , giving access to the money if needed. Or keep all in the pension and benefit from an annual increase of pension. Thanks for any guidance. I realise you can't give personal advice but do you have any genetal thoughts or feelings rather than " it depends " :) . Thanks

[@davidpearson243]

My wife has just taken her NHS pension at 55 it works out at 12k of tax free lump sums buys 1k of yearly pension she has taken 36k less lump sum in exchange for 3k NHS pension per year index linked (I think you will have to invest very well to get returns like that year in year out )I’m not how she will be taxed as her pension is over 12,570 so she will get taxed on the amount above that I think

[@johnristheanswer]

@@davidpearson243 Thanks for reply. I completely agree. 8% return is huge. I was just wondering if it's worth the Tax Free sum as a bit of insurance. I.e. To pass on to kids / help with house deposit at the expense of losing a bit of pension. 75% would still be in pension and 25% growing at ~5% seems a good balance ?

[@davidpearson243]

@@johnristheanswer I’m not sure NHS pension work like a pot of money My Wife was offered 78k lump sum and £11400 per year pension or 42k lump sum £14 400 pension index linked there was no other option It said on her statement that the pension was worth over 600k !!!! (I suppose that’s what it would cost if you went to an insurance company to buy that benefit)

[@johnristheanswer]

@@davidpearson243 Oh ! I've not looked into the finer details yet as still a couple of years away. I know I can request details of benefits but it takes a few weeks to get them. Thanks

[@johnristheanswer]

It appears from doing google research that you can take 25% Tax Free cash from NHS pensions.

[@MrETHAN1218]

Could you crystallise 100k and take 25k tax free?

[@EdmundBaileyUK]

Yes absolutely.