Are future pension pot withdrawals 25% tax-free ?

Pension Pot withdrawn with 25% tax free. Another pot contributed to. Will then be tax free at 25% ?

Didn't find your answer?

Hello

Can't find a definitive answer online so wanted to run past learned colleagues..

If a Pension Pot is fully withdrawn with 25% tax free but then the pot is contributed to post will the next time the individual withdraws the pot fully have another 25% tax-free or is this just a one-off on the first pot?

E.g

Pension Pot £100,000 is full withdrawn in 2024.

£25,000 tax free and £75,000 taxable.

Contributions then continue until 2034 and build to a level of £50,000

Will the the £50,000 be tax-free at 25% ?

Many thanks

Justin

Replies (27)

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By D V Fields
08th Apr 2024 14:41

Am sure I'll be corrected if I am wrong but 25% of each withdrawal is tax free. Therefore your scenario where the whole pot is taken and then further pots are created - they too fall to be covered by the 25% tax free element. Let's not give the government ideas.

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Replying to D V Fields:
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By Metaller76
08th Apr 2024 14:52

ha - quite!
Thanks.

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Replying to D V Fields:
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By FactChecker
08th Apr 2024 15:20

I assume there's a typo in there?
It's certainly not true that "25% of each withdrawal is tax free" ... as that would mean that 75% of every withdrawal is taxable.

25% of the fund (cumulatively via multiple withdrawals if not in one go) is what I understood to be tax-free ... obviously subject to all the other LTA etc constraints.

So I'd suggest that a new fund could 'start again' - but it might be complicated proving that if the new funds go into the same original fund? (see my post below).

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Replying to FactChecker:
By Ruddles
08th Apr 2024 16:00

FactChecker wrote:

It's certainly not true that "25% of each withdrawal is tax free"

It might be - it depends on how extraction is structured. Two basic options are 25% lump-sum tax-free and all future withdrawals taxed (eg flexi-access drawdown), or 25% of each withdrawal untaxed ('uncrystallised funds pensions lump sums')
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Replying to Ruddles:
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By FactChecker
08th Apr 2024 16:12

Hoist by my own petard ... and trying to be 'clever' with my if/then breakdown of the phrase!
But I still think the original phrase was open to misinterpretation by many IF they hadn't cottoned to the important missing bit that you've added in parentheses.

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By David Ex
08th Apr 2024 15:00

I believe so, subject to the generally applicable conditions and limits.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063210

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Intercity
By Mr Hankey
08th Apr 2024 15:05

It's not something I'm familiar with so don't know the answer, others on here probably will do.

If that was the case I wonder if it would be possible for people aged 55 & over who were still working, for themselves via a limited company, to keep contributing and withdrawing at the same time.

Ie contribute into a pension from the ltd company, claim at CT deduction on it, next day withdraw 25% of it tax-free to themselves. And keep doing that over and over again.

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Replying to Mr Hankey:
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By Metaller76
08th Apr 2024 15:08

This is what I have been considering!
I will be in this situation personally in 7.5 years..

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Replying to Mr Hankey:
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By David Ex
08th Apr 2024 15:17

Mr Hankey wrote:

It's not something I'm familiar with so don't know the answer, others on here probably will do.

If that was the case I wonder if it would be possible for people aged 55 & over who were still working, for themselves via a limited company, to keep contributing and withdrawing at the same time.

Ie contribute into a pension from the ltd company, claim at CT deduction on it, next day withdraw 25% of it tax-free to themselves. And keep doing that over and over again.

I'd forgotten about this which might be of relevance:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810

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Replying to Mr Hankey:
Johny Fartpants Picture
By johnny fartpants
08th Apr 2024 15:17

I think that the "catches" here are that, once you have drawn down on your pension, your future contributions are restricted.

The restriction used to be £2,880 (net) a year but I think this was increased in the last budget?

You also only get the tax relief on the "new" pension contributions until you are 75 years old so, under the old (£2,880) limit you could only build up a relatively minor pot in this way before you became too old benefit.

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Replying to johnny fartpants:
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By Metaller76
08th Apr 2024 15:29

Thanks but what if you're still working and you contribute?
I think the £2,880 Net is max can input is not working.
If someone earns £100,000 they can put in £60,000 even if they have withdrawn pot prior?
So not recycling but still earning and contributing legitimately?

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Replying to Metaller76:
Johny Fartpants Picture
By johnny fartpants
08th Apr 2024 15:42

Hi Metaller76. Future contributions are restricted as you will have triggered what’s known as the Money Purchase Annual Allowance (MPAA).

Something funny about my name?? Actually don't answer that last bit :-(

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Replying to johnny fartpants:
Johny Fartpants Picture
By johnny fartpants
08th Apr 2024 15:43

Whoops. I see that DavidEx beat me to it.

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Replying to johnny fartpants:
Johny Fartpants Picture
By johnny fartpants
08th Apr 2024 15:52

And the contributions were restricted to £4,000 per year (rather than £2,880 as I incorrectly specified earlier) but it would seem this has now increased to £10,000 per year. Every day's a school day!

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Replying to johnny fartpants:
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By Metaller76
08th Apr 2024 15:52

So can put in £10,000 per annum under MPAA

https://www.unbiased.co.uk/discover/pensions-retirement/managing-a-pensi...

Thanks for the advice

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By FactChecker
08th Apr 2024 15:15

There's no simple answer (and I'm not the person to attempt it), so you need to look up all the associated guidance (or preferably legislation).

But unless things have changed fairly recently (as they do frequently in these fervid political times), what you definitely can NOT do is 'reinvest' your tax-free withdrawal in the fund and then go on to take a further tax-free slice (and so on ad infinitum).
And convincing HMRC that is not what you are doing (recirculating monies) can be hard to prove unequivocally.

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Replying to FactChecker:
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By Metaller76
08th Apr 2024 15:30

Sure - thanks.
See my response to 'johnny fartpants' (had to type that just for laughs).

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By David Ex
08th Apr 2024 15:20

Also there is a reduced annual allowance if benefits have been drawn from a DC scheme:

https://www.gov.uk/guidance/work-out-your-allowances-if-youve-flexibly-a...

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By Justin Bryant
08th Apr 2024 15:50

If you like to bore people with obscure tax knowledge, p12 here explains why it's tax-free in the first place: https://researchbriefings.files.parliament.uk/documents/SN02181/SN02181.pdf

The above article also shows that this highly generous 25% tax-free relief ain't guaranteed to continue.

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Replying to Justin Bryant:
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By FactChecker
08th Apr 2024 22:45

An interesting history lesson ... part of the many volumes being published at that time in the period that led up to the launch of AE (which of course is irrelevant to most of this).

The whole 'structure' is under almost permanent review (so "ain't guaranteed to continue" is an understatement) ... and there are still voices, which come and go in cycles, calling for the 'reversal of the tax treatment' (as in stop contributions from being FOT but make pension extraction no longer liable to tax)!

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Replying to Justin Bryant:
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By cssnetworks
09th Apr 2024 12:11

Justin Bryant wrote:

If you like to bore people with obscure tax knowledge, p12 here explains why it's tax-free in the first place: https://researchbriefings.files.parliament.uk/documents/SN02181/SN02181.pdf

The above article also shows that this highly generous 25% tax-free relief ain't guaranteed to continue.

I've just started reading that. Is this really a piece of parliament writing?
"... lump sums only count as authorised payments if specific
circumstances. "
...
" There are also rules allowing small amounts of
pension saving can be taken as a lump sum."

That's pretty poor, and I'm only about 12 lines into the document.

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Replying to cssnetworks:
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By Justin Bryant
09th Apr 2024 13:07

I've never read a clear and correct explanation of pension taxation, so it's not surprising (especially as it's just a summary). I doubt there are any clear and correct text books on the subject (other than that below perhaps), as it's so bloomin complicated.
https://www.sweetandmaxwell.co.uk/Product/Pensions/The-Taxation-of-Priva...

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Replying to Justin Bryant:
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By cssnetworks
09th Apr 2024 13:12

Justin Bryant wrote:

I've never read a clear and correct explanation of pension taxation, so it's not surprising (especially as it's just a summary). I doubt there are any clear and correct text books on the subject (other than that below perhaps), as it's so bloomin complicated.
https://www.sweetandmaxwell.co.uk/Product/Pensions/The-Taxation-of-Priva...

I just mean the spelling mistakes everywhere. There were loads more. Page 12 has the same paragraph (5.4 at the bottom) repeated twice. It's just really badly proofed I suppose.

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Replying to cssnetworks:
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By Justin Bryant
10th Apr 2024 13:53

Well, yes, that proves my point if that's one of the better ones! Maybe I should write my own book if that's the best the market has to offer.

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Replying to Justin Bryant:
paddle steamer
By DJKL
09th Apr 2024 13:30

On pensions the best guides I have ever found are those within the various Life Office technical guides, some of their pamphlets etc, aimed at IFAs, were remarkably good.

It is now years since I looked , I think you used to need to pretend to be an IFA (click a box but no identifier) and maybe that does does not work these days, but if you mooch around, ask a friendly IFA where to look, you maybe can still get access to some good resources.

I would also mention that some of the posters on the Lemon Fool pension pages are pretty decent re their subject but maybe mentioning another website is not the best thing to do on here.

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By DSG
04th May 2024 15:31

https://www.ajbell.co.uk/faq/can-i-make-additional-contributions-my-sipp....

Can I make additional contributions to my SIPP after starting drawdown?
Yes, you can, although how much you can contribute to your SIPP depends on what type of drawdown you have.

If you only take your tax-free lump sum from your SIPP, and haven't taken any income payments, you can contribute the same amount to your SIPP as usual.

However, if you have flexi-access drawdown (rather than the older capped drawdown) and take an income payment, from that point on you can only contribute up to £10,000 each year to all money purchase pensions. This includes your AJ Bell SIPP. Also, you'll no longer be able to use any unused allowances from previous tax years (known as ‘carry forward’).

If you have the older capped drawdown, this restriction doesn’t apply. You'll still have an annual allowance of £60,000 even after taking an income payment.

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Replying to DSG:
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By FactChecker
04th May 2024 18:19

Interesting no doubt to anyone who has posed the question with which the article that you've copy'npasted commences ... but as that isn't the question asked by OP what was the purpose in posting this?

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