Simple (?) question about a pension 31 December 2014 at 7:41PM edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning 6 replies 937 views

Mrs_Z

Hi fellow forum folks,
I'm trying to get my head around pensions as I feel the clock is ticking and we have no decent pension plan for the OH who is a higher rate tax payer. There are a couple of questions that I'm trying to understand.....

1) So, say we accumulate a pension pot worth of X, which then provides one an income for the pension years.

But what happens to the pension pot x (ie. the capital) once the person receiving the pension dies?

2) I read a lot about the tax benefits of extra pension contributions, especially for higher rate tax payer, but once you are in receipt of the pension, don't you have to pay tax so isn't this +-0?

Thanks in advance,

MoneySavingUser

1) from here: https://www.gov.uk/government/news/chancellor-abolishes-55-tax-on-pension-funds-at-death

From next year, individuals with a drawdown arrangement or with uncrystallised pension funds will be able to nominate a beneficiary to pass their pension to if they die.

If the individual dies before they reach the age of 75, they will be able to give their remaining defined contribution pension to anyone as a lump sum completely tax free, if it is in a drawdown account or uncrystallised.

The person receiving the pension will pay no tax on the money they withdraw from that pension, whether it is taken as a single lump sum, or accessed through drawdown.

Anyone who dies with a drawdown arrangement or with uncrystallised pension funds at or over the age of 75 will also be able to nominate a beneficiary to pass their pension to.

The nominated beneficiary will be able to access the pension funds flexibly, at any age, and pay tax at their marginal rate of income tax.

There are no restrictions on how much of the pension fund the beneficiary can withdraw at any one time. There will also be an option to receive the pension as a lump sum payment, subject to a tax charge of 45%.

This system replaces the current 55% tax charge

Someone else will be able to explain "crystallised" better than me.

2) People tend to pay lower taxes in retirement so if you save 40% now and pay 20% later you could be better off

Also if you are able to use salary sacrifice you would also save some NI (but only 2% at higher rate bands than 12% at basic rate bands)

Finally you also get to take 25% of the pension pot tax-free

greenglide

If you use the pension to purchase an annuity and the person dies payments stop unless the annuity has cover for a surviving spouse. It can have a minimum payment period (up to ten years) as well.

Purchase of an annuity has not been compulsory for many years not, the announcements by the government removing the compulsion have been much overhyped.

You can also leave the money invested and take regular or iregular payments - this is "drawdown" and the money remains under your control and passes to a serving spouse or children.

kidmugsy

MoneySavingUser wrote: »

Someone else will be able to explain "crystallised" better than me.

It refers to starting to take money out of the pension pot, either by buying an annuity, or taking a Pension Commencement Lump Sum (in whole or in part), or by beginning Income Withdrawal (aka Income Drawdown).

jamesd

Mrs_Z wrote: »

we have no decent pension plan for the OH who is a higher rate tax payer... 2) I read a lot about the tax benefits of extra pension contributions, especially for higher rate tax payer, but once you are in receipt of the pension, don't you have to pay tax so isn't this +-0?

Pension income is taxable income but:

1. 25% is a tax free lump sum so a basic rate tax payer makes 6.5% on the deal even if they are paying basic rate income tax both when paying in and on the way out.

2. While taxable, it won't all be taxed because of the income tax personal allowance. Assuming £10k personal allowance and 8.5k state pension there will be 1.5k untaxed, a gain of an additional £300 a year in unpayable income tax on those who have that or more pension.

3. It's common to retire at least a few years before state pension age and during this time the whole personal allowance may be available, perhaps giving a tax saving of £2k a year for this time.

Those who are higher rate income tax payers while working and who make pension contributions from higher rate money are often basic rate income tax payers when retired so they can make a gain on the income tax. Even if paying higher rate in retirement, they can make a tax gain on the portion of their income that is taxed at basic rate.

atush

If your OH is a HRTaxpayer, have him start a pension asap.

Each 100 into the pension will cost him only 60 so a huge boost. and as described above, there isn't always a large tax to pay once retired. At a bare minimum many who pay HRT when in work, pay only BRT once retired.

Mrs_Z

Thank you for the replies. There is definitely there things to think about. The fact that OH is a higher rate tax payer now but not necessarily at the time of retirement had never crossed my mind. Also, I now understand the difference between an annuity and income drawdown. Still, bit of a minefield!