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    • simonfitba
    • By simonfitba 13th Sep 17, 8:39 PM
    • 165Posts
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    simonfitba
    tax-free lum sums and personal allowance
    • #1
    • 13th Sep 17, 8:39 PM
    tax-free lum sums and personal allowance 13th Sep 17 at 8:39 PM
    My mum is taking tax-free lump sums of 5% from her pension pot each year for five years as part of her tax-free lump sum.

    But she needs an additional £5k for home improvements.

    Would it be possible to take the £5k from the taxable part of the pension as it wouldn't be taxed as she is below the £11,500 annual personal tax allowance?

    Or would it be better to take it from the pension's tax-free lump sum, or even her ISA?

    Just trying to save an old lady some tax...
Page 1
    • Linton
    • By Linton 13th Sep 17, 9:13 PM
    • 8,448 Posts
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    Linton
    • #2
    • 13th Sep 17, 9:13 PM
    • #2
    • 13th Sep 17, 9:13 PM
    If she currently has an income of £6500 or less then she could take £5K of taxable pension without having to pay tax. Clearly this is a very sensible thing to do if she expects to be a taxpayer in the future. In practice because of the way PAYE works she would probably be charged 20% tax and then claim it back from HMRC.

    Note that you cant drawdown taxable pension without also taking, or having already taken, the TFLS.
    • simonfitba
    • By simonfitba 13th Sep 17, 9:19 PM
    • 165 Posts
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    simonfitba
    • #3
    • 13th Sep 17, 9:19 PM
    • #3
    • 13th Sep 17, 9:19 PM
    Cheers Linton.

    She is taking 5% each year for five years (tax-free) I think this is how she is using the TFLS. Does this seem right?
    She is doing this through an IFA, that's why I'm unsure.
    • zagfles
    • By zagfles 13th Sep 17, 10:57 PM
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    zagfles
    • #4
    • 13th Sep 17, 10:57 PM
    • #4
    • 13th Sep 17, 10:57 PM
    Cheers Linton.

    She is taking 5% each year for five years (tax-free) I think this is how she is using the TFLS. Does this seem right?
    She is doing this through an IFA, that's why I'm unsure.
    Originally posted by simonfitba
    Doesn't seem right to me - if she has spare personal allowance then it would usually be sensible to use it by drawing down from the taxable part. Unless she thinks she'll never pay tax? If she doesn't need it she could put it in an ISA. It's something she should discuss with her IFA, that's what she pays him for. There might be other reasons for this odd arrangement.
    • ukdw
    • By ukdw 14th Sep 17, 12:18 AM
    • 47 Posts
    • 35 Thanks
    ukdw
    • #5
    • 14th Sep 17, 12:18 AM
    • #5
    • 14th Sep 17, 12:18 AM
    If she currently has an income of £6500 or less then she could take £5K of taxable pension without having to pay tax. Clearly this is a very sensible thing to do if she expects to be a taxpayer in the future. In practice because of the way PAYE works she would probably be charged 20% tax and then claim it back from HMRC.

    Note that you cant drawdown taxable pension without also taking, or having already taken, the TFLS.
    Originally posted by Linton
    If she has an income above £6,500 then it is still worth taking whatever portion of the £5k ifits within the £11,500 tax free, and then taking the rest as a TFLS to avoid wasting valuable tax free allowances.

    It is also worth understanding how the pension is proposed the work after the 5 years TFLS's have been exhausted.
    • Dazed and confused
    • By Dazed and confused 14th Sep 17, 4:18 AM
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    Dazed and confused
    • #6
    • 14th Sep 17, 4:18 AM
    • #6
    • 14th Sep 17, 4:18 AM
    It is entirely possible that the op's mum could take more than £5k of taxable pension and ultimately not have any tax to pay even if her other income was greater than £6,500.

    All depends on what her other income consists of, if some is savings interest or dividends she may become liable to be taxed but only at one of the 0% tax rates.
  • jamesd
    • #7
    • 14th Sep 17, 6:28 PM
    • #7
    • 14th Sep 17, 6:28 PM
    She is taking 5% each year for five years (tax-free) I think this is how she is using the TFLS. Does this seem right?
    She is doing this through an IFA, that's why I'm unsure.
    Originally posted by simonfitba
    No, it doesn't seem right. She has a use it or lose it income tax personal allowance each year. She should be taking taxable money from her pension to use her personal allowance and putting the portion she isn't using into an ISA. That way it's tax free on the way out and tax free later when she needs it for income. Not just 25% tax free, all 100% this way.

    If she also has interest income that can stay tax free even if she takes taxable pension money up to her personal allowance because of the combination of the starting rate for interest (£5k a year at 0% income tax if other income is within personal allowance) and personal savings allowance (£1k a year).

    Assuming she's under 75 she should normally be paying £2880 a year net into a pension to have it grossed up to £3600 a year by the basic rate income tax relief, which she gets even if paying no income tax. Taking tax free money or money within her personal allowance from a pension to fund this is a good move. So is taking money from a pension that she'll pay basic rate income tax on, since she still get the gain on the tax free 25% on the way out.

    I've assumed that her total pension value is not close to a million Pounds so there's no potential for a pension lifetime allowance charge.

    It's possible that the cost of doing these things through an IFA might be more expensive than the benefit from doing them. If so and if she wants to continue with the IFA she might ask for regular payments to be set up once that might sometimes result in her paying some income tax, so the IFA doesn't have to do some work each year to adjust things. Not quit perfect things like this don't have to be done at the times of the year when IFAs are busy.
    Last edited by jamesd; 14-09-2017 at 6:35 PM.
    • simonfitba
    • By simonfitba 16th Sep 17, 10:22 PM
    • 165 Posts
    • 71 Thanks
    simonfitba
    • #8
    • 16th Sep 17, 10:22 PM
    • #8
    • 16th Sep 17, 10:22 PM
    Cheers for all the responses. I think the IFA might have missed a trick if she's only taking TFLS and not using her allowance. I'll look into it.
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