What does the calculator show?
The calculator starts by showing you the tax you will pay on a one off taxable pension withdrawal given the other taxable income you already have for the current tax year. It goes on to show how this might reduce if you spread the withdrawal over up to three tax years.
Guide to the Pension Withdrawal Calculator
Who will it be useful to?
This calculator is designed to help those over the age of 55 who are considering making a one off withdrawal from their pension fund using the new pension freedoms.
What does the calculator show?
The calculator starts by showing you the tax you will pay on a one off taxable pension withdrawal given the other taxable income you already have for the current tax year.
It goes on to show how this might reduce if you spread the withdrawal over up to three tax years.
To do this accurately you will need to enter in the other taxable income you expect to have in the next two tax years. The calculator assumes an even split of the withdrawal over three years, but you can override this and enter in different withdrawals in each tax year to see how the saving varies.
Remember that if you are thinking about a withdrawal in March towards the end of the tax year, this can be split over three tax years in just 13 months by making the following withdrawals:
- Withdrawal 1 on or before the 5th of April
- Withdrawal 2 on or after the 6th of April
- Withdrawal 3 on or after 6th April of the following year
How does it work?
Taxable pension withdrawals are taxed at your marginal income tax rates which means adding them to your other taxable income in the tax year and then seeing which income tax band they fall into and taxing them at the applicable rate. So Tideway have input the current and expected income tax rates and bands for the current and next two tax years into the calculator and makes this calculation just as it will done by HMRC.
Spreading withdrawals over two or three tax years will generally allow more or the withdrawals to be made at the lower rates and hence save you tax.
Important Points to Consider When Making Withdrawals
Your 25% Tax Free Cash
Personal pensions allow for a 25% tax free withdrawal before further withdrawals are deemed taxable. So for example if you have £100,000 in your pension fund and have yet to make any withdrawal you could withdraw up to £25,000 without paying any tax, but further withdrawals would be taxed.
The amount of the tax free cash sum is limited to 25% of the current Lifetime Allowance. It can only be taken once, so if the fund then grows further there is no more tax free. It can be spread over one than one year assuming your pension is segmented, this is often called phased retirement.
Emergency Tax on ‘One Off’ Withdrawals
Pension withdrawals are taxed at source much like the Pay As You Earn (PAYE) system, with the tax deducted by your pension administrator. On regular withdrawals the tax withheld is calculated on the basis of the same size withdrawal each month with any adjustment made in the last month of the tax year.
With one off withdrawals pension administrators must apply an emergency tax rate at source, this is not their choice, they must do it under HMRC rules. This tax is going to be significantly more the tax shown on the calculator.
To reclaim this tax you need to complete one of three HMRC forms P50Z, P53Z, or P55 which can be found and are explained at https://www.gov.uk/claim-tax-refund/you-get-a-pension.
The Impact on Income Sustainability
If you are going to make a significant one off withdrawal from your pension fund then you need to think about how this will impact what future income that fund will be able to pay out. This will mean doing some form of projection over time of your fund value, investment returns and future withdrawals. You can use Tideway’s Drawdown Calculator to do this for you.
Get Help and Advice
If you are in any doubt as to what tax you will pay on your planned pension withdrawal, how it will impact your future pension withdrawals and whether you might save tax by spreading the withdrawal get the help of a suitably qualified pension adviser.
- Please be aware that this calculator is based on our understanding of current HMRC rules and guidance.
- It is intended as guidance only and Tideway cannot be held responsible for any tax liability incurred as a result of using this calculator.
- The actual tax you may be liable for is dependent on individual circumstances and, to ensure you have an accurate understanding of your tax liability, we recommend you seek professional advice