Pension Tax.

atush

geraint85 wrote: »

CLAPTON
is you employer paying into the pension too?

Yes. My company is paying 2% this year. 4% next year, and 5% for every following year. However, the minimum that I have to contribute is 4%. I opted for 10% as I thought I'd be getting 20% tax free.

Ok, here' s the deal. Gonna dumb it down.

1-You save 80 in a pension, but the govt makes that 100 overnight. result, 20-% extra. Called tax relief.

2-Then, your employer pays in (2-4-6%- whatever). This is called FREE MONEY.

So save 80 on your own. Then you have 80. Save 80 into a pension and you have 100 plus the employers contrib (lets call that 100 too). So, what is bette, 80 or 200?

Ok, if you actually save enough to make 5K in pension income (will be more tnha a 100K pot) in addition to your State pension- yes you might pay 20% on your pensions income.

But you, who paid only 80 for eaCH 200 in the pot (not to mention the other 200 in there from tax free growth of your pension) will have taken out 25% tax free. So you will be paying 20% tax on income over your tax free allowance which you may or may not have used up?

It is a no brainer. You get 5K plus on SP. but get nearly 10K for a personal allowance. So you can earn up to 5Kish w/o paying tax.

[Deleted User]

geraint85 wrote: »

Dunstonh.. Can you explain this bit. How is the income not the pension? I dont think i'm understanding it correctly. thanks for your reply.

dunstonh
Only the income but thats not the pension (caveat applies).

A pension and your pension pot are different. Your pension pot is the sum of money that is available as part of your pension, it is made up of your contributions, employer contributions and the returns on the investments made. Your pension pot is never taxed, you could have £1,000,000 sitting in your pension pot for 20 years and HMRC would not see a penny of it.

Your pension pot is used to give you retirement income (a pension) and as with all sources of income you owe income tax but only if you exceed the income tax allowances. This year (2013 - 2014) the income tax allowance for a person aged 65 is £10,500, therefore a pensioner that has an income of under £10,500 will not pay any tax, even if their pension pot has £1,000,000 in it.

Fred is a fictional pensioner who will be retiring in 2013 at age 65, his pension pot is estimated to have £100,000 in it at his retirement and he will be taking the full 25% tax free lump sum. After he has taken the tax free lump sum his pension pot will have £75,000 remaining, he plans to take the maximum available yearly amount (just over 5%) which is £4,320. The income tax allowance for Fred is £10,500 which means he will not pay any income tax as a pensioner, therefore his pension is literally tax free.

There are a number of different ways to use a pension (annuity, drawdown etc) and the way in which your pension will be used does vary, my example is only meant to illustrate the basic pension tax concept and not explain exactly how your pension may or may not work when you do come to retire.

mgdavid

citricsquid wrote: »

...........
Fred is a fictional pensioner who will be retiring in 2013 at age 65, his pension pot is estimated to have £100,000 in it at his retirement and he will be taking the full 25% tax free lump sum. After he has taken the tax free lump sum his pension pot will have £75,000 remaining, he plans to take the maximum available yearly amount (just over 5%) which is £4,320. The income tax allowance for Fred is £10,500 which means he will not pay any income tax as a pensioner, therefore his pension is literally tax free.
...........

to take 'just over 5%' implies Fred is in Drawdown, but I thought you had to have other guaranteed pension income of 20k pa to use drawdown, so the income tax allowance would be used up by that other income and the DD income would be fully taxed?

grey_gym_sock

the 20k minimum only applies to flexible drawdown (which lets you draw as much as you like - even the whole pension pot in 1 go); it doesn't apply to capped drawdown (for which the limit might be around 5%).

mgdavid

grey_gym_sock wrote: »

the 20k minimum only applies to flexible drawdown (which lets you draw as much as you like - even the whole pension pot in 1 go); it doesn't apply to capped drawdown (for which the limit might be around 5%).

many thanks for that - clearly I'm still learning !