Small Pension access

Supersaint13

I have just retired and in addition to my main pension, which I am using as my income and from which I have also withdrawn the maximum tax free lump sum, I have two smaller pensions.

I want to withdraw both of these in full; one is for approx £13k, the other approx £1.5k

I have been presented with 2 options for the smaller one of these two, one called a "One-off payment "Whole Fund" option" which would realise just over £1500 (as the tax deduction is less) the other called "Small lump-sum payment option" which would realise £1329 as there is a larger tax deduction.

Am I able to take both of these smaller pensions as "One-off whole fund" options or not?

Any advice would be gratefully received.

Thanks

jem16

Supersaint13 wrote: »

Am I able to take both of these smaller pensions as "One-off whole fund" options or not?

Assuming both of these are Defined Contribution schemes, then you can take 25% tax free from each and the other 75% as taxable income so yes you can take the whole lot if you wish.

Whether of course this is a good idea or not will depend on what your other income is and if withdrawing the whole lot on both would see higher rate tax applied.

xylophone

Remember that anything over the tax free PCLS would be taxed as income in the year of receipt- will you be pushed into higher rate tax?

jamesd

Supersaint13 wrote: »

I have been presented with 2 options for the smaller one of these two, one called a "One-off payment "Whole Fund" option" which would realise just over £1500 (as the tax deduction is less) the other called "Small lump-sum payment option" which would realise £1329 as there is a larger tax deduction.

I'm aware of no way in which you can produce a difference of that sort in tax due when taking the money all at once.

Please ask them to use the correct legal terminology for the options so it's possible to work out what they are really offering. The options should be either uncrystallised funds pension lump sum or flexi-access drawdown. The total tax due should be identical because in both cases 75% is taxable at your marginal income tax rate and you are taking all of the money in the pot.

HMRC rules in Pension Schemes Newsletter 68 specify that if you are taking out the whole amount the pension scheme provider should treat it as a one-off payment: "If someone chooses to empty their pension fund in a single withdrawal, and their pension provider does not hold a current P45 for them, the provider will deduct tax from the payment at a temporary rate (called emergency rate)". If you are not taking out the whole amount they should treat it as the first in an ongoing series of monthly payments.

It appears that the £1329 option is likely to be flexi-access drawdown where they are incorrectly deducting income tax as if it is the first of many payments even though the whole pension pot is being withdrawn. If that is so, please ask them to read HMRC's Pension Schemes Newsletter 68 and correct their handling where it is being used to withdraw the whole pot.

You should also ask them to confirm that in both cases they will be issuing you with a P45 after the payment because nothing is left in the pot. Per the newsletter, that is what they are supposed to do when all money has been taken from the pot.

In both cases you will probably have more tax than necessary deducted and can send a form to HMRC to reclaim the excess. This is because the withdrawing would be on the emergency tax code. See section 7e of the document I linked to for the right form to use.

Supersaint13 wrote: »

Am I able to take both of these smaller pensions as "One-off whole fund" options or not?

If the firms offer UFPLS or flexi-access drawdown, yes. Either of those can be used to provide a once-off access to a whole fund but they probably mean UFPLS. UFPLS is the easiest thing to add to old schemes.

It's worth repeating: there is no difference in income tax due. It's all down to how much has to be deducted by them before they make the payment to you, and they appear to be getting that wrong in the lower payment case. In both cases you're going to end up asking HMRC for a refund of overpaid tax, all that differs is how much the overpayment will be.