Case Study 1 – Ex-Investment Banker Samantha and her flexi-access pension pot

Samantha Taylor is an ex-investment banker living in Kensington, London. Samantha stress-tested her investments in Timeline and to her pleasant surprise, she figured out she can retire now at the age of 62. She is excited about starting her retirement journey so early but at the same time she wants to be sure about the income taxes she will be paying. Making a fortune is one thing, sustaining it is another.

No problem Samantha, we’ve got you. Let’s break down your income taxes. Samantha has a total of £6,500,000 in her Flexi-Access Drawdown account - invested in the default balanced portfolio - and a State Pension of £10,000 (in gross terms) kicking in when she is 67. She wants to start withdrawing £165,000 (in gross terms) and adjust her income in line with inflation. She also pays just a small 1% fee to her financial planner for his services.

Let’s see the taxes she is paying in the first year in real terms.

Tax at Personal Allowance: [0% * £12,500] = £0

Tax at Basic Rate: [20% * £37,500] = £7,500

Tax at Higher Rate: [40% * £100,000] = £40,000

Tax at Additional Rate: [45% * £15,000] = £6,750

Total Tax: £0 + £7,500 + £40,000 + £6,750 = £54,000

Note 1: The total taxable income is £165,000. The first £12,500 are not taxed (personal allowance), the next £37,500 are taxed at the basic rate (20%), the next £100,000 are taxed at the higher rate (40%) and the remaining £15,000 are taxed at the additional rate (45%).

Note 2: When selecting the flexi-access pension drawdown account in Timeline, we assume that Samantha has already withdrawn the 25% cash-free-lump sum. All the income she withdraws from this pot is fully taxed at the marginal rates. Please see Flexi-Access Drawdown & Uncrystallised Funds | Timeline Help Centre (timelineapp.co)

Samantha is going to receive a £165,000 yearly income in gross terms and will pay £54,000 in taxes. This leaves her with a yearly net income of £111,000. In other words, £13,750 in gross terms per month and £9,166.60 in net terms per month.

Let’s now look at how Samantha will be taxed when she is 68 and it has been one year since her State Pension kicked in. Samantha still needs £165,000 in real terms. She will receive £10,000 from her State Pension and the rest £155,000 from her flexi-access pension pot.

Timeline always withdraws first from guaranteed income sources like State Pension and the rest from the remaining accounts based on the selected account order. The combined income of £165,000 (£10,000 from State Pension and £155,000 from flexi-access) will be taxed at the marginal rates. That is,

Tax at Personal Allowance: [0% * £12,500] = £0

Tax at Basic Rate: [20% * £37,500] = £7,500

Tax at Higher Rate: [40% * £100,000] = £40,000

Tax at Additional Rate: [45% * £15,000] = £6,750

Total Tax: £0 + £7,500 + £40,000 + £6,750 = £54,000

Note 3: The total taxable income is £165,000. The first £12,500 (£10,000 from State Pension and £2,500 from the flexi-access pot) are not taxed (personal allowance), the next £37,500 are taxed at the basic rate (20%), the next £100,000 are taxed at the higher rate (40%) and the remaining £15,000 are taxed at the additional rate (45%).

That leaves her with £13,750 in gross terms per month and £9,166.6 in terms per month.

Awesome! Now Samantha can safely start her retirement having peace of mind of her retirement income success and knowing in advance the taxes that are coming in her way!

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