![]() Income paid out under drawdown is taxed as pension income under PAYE in the year of payment. For example, someone with scheme-specific tax free cash protection will still be able to take the protected amount above the standard 25%. Unlike UFPLS, TFC from drawdown is not limited to 25% if an individual has protected cash over this amount. If it's not taken, the right to take the TFC in respect of those crystallised funds will be lost. When a part of the fund is crystallised, TFC must be taken from that part at that time (but note that no TFC is available for crystallisation events in excess of the lifetime allowance). If pension savings are likely to be made in the future, the availability of the standard annual allowance together with any carry forward allowance will mean that more can be saved without penalty. Tip - Just taking TFC without any drawdown income will not trigger the money purchase annual allowance (MPAA). The individual's age and health will be a dominant factor in this strategy, together with any non-pensions savings they have accumulated. It may make sense to withdraw both taxable income and TFC to meet retirement needs, making use of basic rate bands each year if this is likely to result in a lower amount of tax paid overall. Once all the TFC has been taken, all future withdrawals will be taxable income which could mean more tax in the long term - particularly if future income is pushed into a higher tax band. But it's important to consider not just what results in the least amount of tax today, but the impact on tax due in the future. This strategy could be used in the early years until all the TFC entitlement has been exhausted. Of course, it's possible to just take TFC to meet income needs. This can allow TFC to be used to supplement income, with payments made up of a mixture of cash and taxable income. Benefits can be phased into drawdown, with TFC available each time new funds are crystallised. Up to 25% of the pension fund can normally be taken as tax free cash (TFC). However, income flexibility can also mean those who withdraw everything in one go face a large tax bill.
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