Tax on pension

mazzy

My husband has a defined contribution pension fund of £78,000 and has asked me to ask this question.


If he decides to take the whole pension in one lump how much tax would he pay? He gets £9,360 a year SP and has no other income.


He is not necessarily planning to do this but wanted to know how it was taxed. I know that 25% of the pension is tax free and the first 10,600 of the SP and residue of the pension added together is also free of tax, that leaves £57.260 is that total taxed at 40%?

jem16

mazzy wrote: »

He is not necessarily planning to do this but wanted to know how it was taxed. I know that 25% of the pension is tax free and the first 10,600 of the SP and residue of the pension added together is also free of tax, that leaves £57.260 is that total taxed at 40%?

Well £19500 would be his tax-free lump sum.

That would leave £58,500 to be added to his SP of £9360 to give a total taxable income of £67,860.

£10,600 would be tax free so leaves £57,260 taxable.

Assuming you're talking about next tax year, then £31,785 would be at 20% and £25,475 at 40%.

Total tax bill would be £12,307.

mazzy

Many thanks I thought that was the case but he thought they taxed the whole lot at 40%.

drumtochty

Mazzy

It appears that if you take the lump sum at the begging of the tax year say May 2015, a larger proportion may well be taxed at 40% and that will be refunded, I believe April 2016.

I would phone up HMRC and ask to get the correct answer.

kidmugsy

Note that he could avoid the 40% tax band altogether by withdrawing the money across two tax years. Another trick is to defer his State Retirement Pension until he's safely pocketed the DC money: the reward for that is, for old-style state pensions, an extra 10.4% onto the state pension for each year of deferral. I note that after the hubbub of the withdrawal is past, he'd get some or all of this Extra Pension tax-free (depending how long he deferred for).

mazzy

His pension is with Friends Life, I don't think they have made their minds up about Drawdown yet. Is that possible then to take a drawdown of the complete amount over two years.


He is pondering the SP deferral, how does one do that as he is already drawing it.

kidmugsy

mazzy wrote: »

His pension is with Friends Life, I don't think they have made their minds up about Drawdown yet. Is that possible then to take a drawdown of the complete amount over two years.

If they are uncooperative, he could transfer to a provider which isn't, such as Hargreaves Lansdown. He might like to compare their charges with their competitors'. In my experience transfer is dead easy.

mazzy wrote: »

He is pondering the SP deferral, how does one do that as he is already drawing it.

https://www.gov.uk/deferring-state-pension/what-you-may-get

mazzy

Thank you that is very helpful.