Summary
Flexi-Access Drawdown: Withdrawals are fully taxed at the marginal rate, as the 25% tax-free lump sum has already been taken.
Uncrystallised Funds: Withdrawals are 25% tax-free, with the remaining 75% taxed at the marginal rate.
Optimized Withdrawal Strategy: By transferring funds between accounts, you can efficiently manage tax-free withdrawals and taxable income.
Description
Pension withdrawals are governed by whether the funds are crystallised (already accessed) or uncrystallised (untouched). This guide explains the process of withdrawals from Flexi-Access Drawdown and Uncrystallised Funds accounts and presents a strategy to achieve efficient withdrawal management.
Pension Withdrawal Types
1. Flexi-Access Drawdown Account
Funds that have already been accessed and moved into a drawdown account.
The 25% tax-free lump sum is assumed to have been withdrawn at the time of access.
Any withdrawals are fully taxed at the individual’s marginal income tax rate.
2. Uncrystallised Funds
Pension funds that have not yet been accessed.
Each withdrawal allows 25% of the amount to be tax-free.
The remaining 75% is taxed at the individual’s marginal income tax rate.
Strategy for Efficient Pension Withdrawals
A structured approach using two accounts can be applied to make the most of tax-free allowances and manage taxable income effectively
.
Steps for Implementing the Strategy
Establish Two Accounts:
Uncrystallised Fund Account: For untouched pension funds.
Flexi-Access Drawdown Account: For managing withdrawals.
Keep the Flexi-Access Drawdown Account at One Pound:
Start with a balance of one pound in this account
Create a contribution from Uncrystallised funds to Flexi Access Drawdown:
Move the desired amount from the Uncrystallised Fund Account to the Flexi-Access Drawdown Account.
Withdrawn Funds:
The first 25% tax-free will be spent that year.
The remaining 75% will be transferred to Flexi Access Drawdown.
Example Scenario
If you aim to withdraw £10,000 tax-free:
Transfer £40,000 from your Uncrystallised Fund to the Flexi-Access Drawdown Account.
In the cashflow chart, you will see the first 25% (£10,000) tax-free spent that year
The remaining £30,000 will be transferred to Flexi Access Drawdown
Conclusion
This structured approach to pension withdrawals allows you to optimize tax-free portions while effectively managing taxable income. By strategically managing funds between Uncrystallised and Flexi-Access Drawdown accounts, you can achieve greater flexibility and efficiency in meeting your financial goals.