Does withdrawal of pension pot affect Tax Credits?

KevinG

I am over 55 and plan to cash in a pension pot in April. 25% of this will be tax free and the rest taxed at my marginal rate. It should just about be covered by my personal tax allowance so there will be no actual tax to pay (although I suspect I might have to pay it and claim it back). What I am wondering is whether the 75% will count as income for Tax Credits purposes. If so, I may have to reconsider.

Thanks for any help.

ffacoffipawb

KevinG wrote: »

I am over 55 and plan to cash in a pension pot in April. 25% of this will be tax free and the rest taxed at my marginal rate. It should just about be covered by my personal tax allowance so there will be no actual tax to pay (although I suspect I might have to pay it and claim it back). What I am wondering is whether the 75% will count as income for Tax Credits purposes. If so, I may have to reconsider.

Thanks for any help.

Yes, it (the 75%) is classed as income.

KevinG

ffacoffipawb wrote: »

Yes, it (the 75%) is classed as income.

Bother. I'm not doubting you, but do you have a link for that? Thanks.

KevinG

blondebubbles wrote: »

Guidance on tax credit income to include is available on their website - https://www.gov.uk/tax-credits-working-out-income#other-income

Yes, but that doesn't actually spell it out. I realise that income from a pension is taken into account but it makes no mention of early withdrawal from a pension fund. I agree it would be rather illogical if this did not count, given that it is the same pot of money being used in a different way, and you even get 25% of it tax free, unlike an actual pension. As I said, I think I will have to reconsider my plan as the hit on the Tax Credits would be substantial.

sheramber

KevinG wrote: »

Yes, but that doesn't actually spell it out. I realise that income from a pension is taken into account but it makes no mention of early withdrawal from a pension fund. I agree it would be rather illogical if this did not count, given that it is the same pot of money being used in a different way, and you even get 25% of it tax free, unlike an actual pension. As I said, I think I will have to reconsider my plan as the hit on the Tax Credits would be substantial.

You are not cashing it in, you are withdrawing income from the Pension plan.

KevinG

sheramber wrote: »

You are not cashing it in, you are withdrawing income from the Pension plan.

It might be treated like that, but the fund has a cash value, which I was planning to withdraw in full, so that definitely is "cashing it in."

WillowCat

tedsd wrote: »

Hi, I thought that I read another thread recently which said that this pot of cash was classed as savings and there are currently no savings limits (but interest over £300 is taken as earnings)

Ted x

They are savings whilst within the pension plan, however withdrawing more than the tax free lump sum in pension drawdown is creating taxable income. Not only will it be taken into consideration for tax credits, it will also be used when calculating student loan repayments (if applicable).

KevinG

tedsd wrote: »

Hi, I thought that I read another thread recently which said that this pot of cash was classed as savings and there are currently no savings limits (but interest over £300 is taken as earnings)

Pension pots are not savings in the conventional sense. They certainly don't affect Tax Credits if they are not drawn down, but my question related to drawing it down and the question appears to have been answered.

sheramber

KevinG wrote: »

It might be treated like that, but the fund has a cash value, which I was planning to withdraw in full, so that definitely is "cashing it in."

Why would it be considered income of you take monthly amount over however many years but not income of you take it as a lump sum?

KevinG

sheramber wrote: »

Why would it be considered income of you take monthly amount over however many years but not income of you take it as a lump sum?

I didn't say it wasn't.

KevinG

blondebubbles wrote: »

If you want to know a definite answer then call them or write to them.

I may well call, could be an interesting conversation.

blondebubbles wrote: »

If you know the ins and outs of tax legislation then there is also more detailed info here - http://www.hmrc.gov.uk/manuals/tctmanual/TCTM04300.htm

Neither that page nor any of the linked pages mentions withdrawals from a pension fund, which is a bit of an oversight.