Tax optimization by spreading the project across two tax years?

I am 75 years old, retired, and because of my health issues I don’t go out much, and live quite frugally. I don’t have a mortgage, or rent to pay, so I can live on my state pension, personal credits, cost of living payments, winter heating allowance etc. I want to turn the £95,000 in pensions I have built-up over my career, into the cash that’s badly needed to refurbish the flat I live in. I have already taken the 25% tax free lump sum. With it I’ve installed a disabled platform lift, and made a down-payment with the builder for some of the planned refurbishments. A friend suggested I should be able to take advantage of some form of tax optimization, by spreading the project across two tax years. Can someone explain to me how that would work, please? Would this all be picked up in self-assessment, or do I need to report it elsewhere?

I think this is the answer... Instead of drawing the entire pension in one go, the idea is to take smaller amounts annually. This is to help you stay in a lower tax bracket and thereby reduce your overall tax liability. Therefore, it depends how quickly I need the money. If I hold my draw-down rate to, say, ~£20,000 per year, for four years, because I have very little income, I should be able to keep the tax I pay to 20%. On the other hand, if I draw down, say, ~£40,000 per year for two years, then it's going to be 42%. Please correct me if that’s not the way it works.

Hi,

As you have already taken the tax free element of your pension, the lump sum payment will be taxable based on your income, which may mean that some or most of your pension lump sum is taxed at 40%.  

Perhaps your friend is suggesting taking your lump sum over two years, to reduce the rate of tax it is payable at. There is no tax optimisation available. You should discuss this with your pension provider of a financial adviser.

Thank you.