pension/personal allowance question

happyhero

Hi sorry if I am being dumb here but I cant seem to find the answers I am looking for.

I have 30 years paid up for state pension, I am 54 and I have 25 years paid in a BT final Salary pension and 2 private pensions.

I see the personal allowance for people born after 5th April 1948 is 10,600 pounds. I know I am not going to withdraw my pension yet but I just want to do the maths if I could draw my pension that year to know how it will work when I finally do.

The bit I don't understand is the personal allowance and how it works with the pension payments. All the illustrations seem to say you can take 25% tax free and the rest is taxed at my marginal rate but where does the personal allowance come in?

For example if I had 100,000 pounds and took 25,000 pounds as my tax free lump sum and then took an income from the remaining 75,000 pounds say at 10,000 pounds per year why does it say this would be taxed at my marginal rate rather than this 10,000 would be tax free because my personal allowance which is 10,600 would cover it?

Also how would personal allowance work with the different pensions, i.e. state pension and private pension?

I'm sure I am mixed up here somewhere, can anyone put me straight please?

molerat

The state pension is taxable but paid gross. Your tax allowance is reduced by the state pension amount to account for this so if a state pension of £5600 pa your tax allowance would be 10600 - 5600 = £5000, producing a code of 500T. This would then be set against your other pensions or income in exactly the same way it is against your wages. If more than one pension payment then it could be split between them.

If you draw private pensions before SP age then your tax allowance would be used against them. If you take all the pension as cash then 25% is tax free and the rest is taxed at source as normal income using a M1 code. Depending on your other income that tax could be too much or too little and may need adjusting at the end of the tax year.

The only lump sum that is truly fully taxed at the marginal rate is a state pension deferred lump sum. This is discounted from income and taxable at whatever rate you are currently paying so if a non tax payer it is tax free.

happyhero

molerat wrote: »

The state pension is taxable but paid gross. Your tax allowance is reduced by the state pension amount to account for this so if sp of £5600 pa the tax allowance would be 10600 - 5600 = £5000. This would then be set against your other pensions in exactly the same way it is against your wages. If more than one pension payment then it could be split between them.

Thanks for that, very helpful info, so why do all the illustrations seem to ignore personal allowance, they only talk about your 25% tax free and say the rest is taxable, are they working on the assumption that you will not have enough pension income to pay tax?

If yes this seems odd when the illustration show pension examples with large sums of 100,000 plus.

I am trying to find the bit I read in the Daily Mail the other day to show what I am referring to but can't quite locate online yet.

happyhero

Also what got me thinking is this, I was wondering if it is possible for me and my wife to each take only enough each year to stay under out personal allowance of 10600 so that we could bring in 21200 between us and yet not pay any tax each year if we maintain the personal allowance figures for the 2 of us.

And increase this each year inline with the personal allowance increases?

JezR

You say a couple of times above that you have seen references to being taxed at the marginal rate.

If you haven't used up the personal allowance, then your marginal rate is 0%.

molerat

Yes perfectly possible. With a personal pension you can take the 25% tax free and draw down the rest to avoid tax but with a state pension and 25 years of BT FS pension avoiding paying tax could prove difficult.

molerat

happyhero wrote: »

Thanks for that, very helpful info, so why do all the illustrations seem to ignore personal allowance, they only talk about your 25% tax free and say the rest is taxable, are they working on the assumption that you will not have enough pension income to pay tax?

If yes this seems odd when the illustration show pension examples with large sums of 100,000 plus.

I am trying to find the bit I read in the Daily Mail the other day to show what I am referring to but can't quite locate online yet.

I think they are talking about taking the whole pension pot as a lump sum and no reference is then made to your personal allowance when it is paid but you would have to sort it out with HMRC at the end of the tax year.

happyhero

thank you thank you for all your help with this, ok going off subject a bit probably, but I have investments within ISA's that I am building up to take during my pension years and my main interest is to avoid tax so I am toying with the idea..........

do I need to worry about using my wife's years personal allowance vs forget about her personal allowance and take the money out as we fancy tax free from my ISA using it as our pension income so that everything stays in my name and simpler, rather than try to manage my investments within accounts under my wife's name as well as mine.

xylophone

If you were drawing your state pension and your BT pension, it is very unlikely that your income would be less than your personal allowance?

If, for example, you reached SPA in the 15-16 tax year and your state pension was £6000 a year and your BT pension £10,000 a year, HMRC would issue a code to the BT Pension Administrator to tax any BT pension in excess of £4600 at 20%.

If you then decided to bring your personal pensions into payment, you could take 25% tax free from each pot but would pay tax on whatever else you drew as income received in that tax year.

Depending on how much you drew, this could be at 20%, 40%.......

happyhero

xylophone wrote: »

If you were drawing your state pension and your BT pension, it is very unlikely that your income would be less than your personal allowance?

If, for example, you reached SPA in the 15-16 tax year and your state pension was £6000 a year and your BT pension £10,000 a year, HMRC would issue a code to the BT Pension Administrator to tax any BT pension in excess of £4600 at 20%.

If you then decided to bring your personal pensions into payment, you could take 25% tax free from each pot but would pay tax on whatever else you drew as income received in that tax year.

Depending on how much you drew, this could be at 20%, 40%.......

Is this something automatic that they do with the BT pension if your example happens or do I need to do something to get them to tax the BT pension?

Just wondering...Can you not take a 25% lump sum from my BT final Salary pension?

xylophone

Just wondering...Can you not take a 25% lump sum from my BT final Salary pension?

Sadly not.. but donations happily accepted..:)

Are you in Section C? Booklet here

http://www.btpensions.net/149/section-c-member-booklet