How to cash my pension in ?

jem16

jamesd wrote: »

Unless, I suppose, you happen to prefer to have as your marginal rate a rate that you pay on none of your income.

Granted I do intend to avoid paying this rate by using pension contributions but without that, 32.5% is exactly the rate I would pay on both my last £1 of income and my additional £1 of income.

In 2015/16 tax year there are actually 8 different rates of income tax ( the MSE article only mentions 3 of them ) and three different types of income tax ( the order of which is very important ) for the purpose of calculating tax. This complication is why it's important to distinguish between marginal rate of tax and using marginal tax bands.

Maybe eventually there will be universal agreement about whether the marginal rate is:

A. the rate on the last Pound of income received
B. the rate on the next Pound of income that will be received
C. the rate or rates on each additional pound of income (the MSE article meaning)
D. something else

Well since the article you linked to in your last post, the link that kidmugsy gave in the other thread , plus two CAs all gave the definition of B, then I think I'll be happy to go with that as the correct definition.

I suggest that anyone reading this also discourages use of the marginal rate term given the widespread variation in interpretation and usage.

Perhaps the correct use should be encouraged.

mgdavid

surely B is undefinable in that one needs to know where the next pound of income is coming from!
If earned exactly to the limit of a tax band, and the next pound is deferred SP lump sum, it will be taxed at the current band rate. But if the next pound is from another source it will be taxed at the band above.

jem16

mgdavid wrote: »

surely B is undefinable in that one needs to know where the next pound of income is coming from!

Exactly. Which is why the marginal rate is only assessable once all income is taken into account.

If earned exactly to the limit of a tax band, and the next pound is deferred SP lump sum, it will be taxed at the current band rate.

Yes so in that case the state pension lump sum is not taxed at your marginal rate but only in that one unique case.

But if the next pound is from another source it will be taxed at the band above.

Yes which is why the marginal rate is defined as being the amount of tax taken on one additional pound. So if your last pound taxed was in the 20% tax band your marginal rate would be 40% as that's what the next pound would be charged at in the case of sitting exactly on the limit of one tax band.

mgdavid

me- B is undefinable in that one needs to know where the next pound of income is coming from!

jem16 wrote: »

Exactly. Which is why the marginal rate is only assessable once all income is taken into account.
...
.... which is why the marginal rate is defined as being the amount of tax taken on one additional pound. ......

me - but this is Option B.

You've just contradicted yourself. I believe your definition of marginal rate doesn't work therefore is illogical.

I think we should all agree to ban the use of 'marginal rate' :-)

jem16

mgdavid wrote: »

me- B is undefinable in that one needs to know where the next pound of income is coming from!

At the point of assessing all your income, you would know where it's coming from.

You've just contradicted yourself.

I don't believe so.

I believe your definition of marginal rate doesn't work therefore is illogical.

It's not "my definition" but the standard definition in accountancy.

I think we should all agree to ban the use of 'marginal rate' :-)

Totally agree on that one. Far better to say that pension income is taxed just as normal earned income.

Marginal rate is really a term that's not required for most people and just causes confusion. Let's leave it to accountants and economists.

mgdavid

jem16 wrote: »

.............. Far better to say that pension income is taxed just as normal earned income.

.........

Disagree, not better as it's wrong, over-simplistic. If the pension income is lumpsum deferred SP?

jem16

mgdavid wrote: »

Disagree, not better as it's wrong, over-simplistic.

Well I suppose that's the drawback of not using the correct terms.

If the pension income is lumpsum deferred SP?

Just need to tell them to take the income then as it's a much better deal.

jamesd

jem16 wrote: »

Well since the article you linked to in your last post... all gave the definition of B, then I think I'll be happy to go with that as the correct definition.

The research paper that I linked to in my earlier post did not use definition B "the rate on the next Pound of income that will be received". It used definition A "the rate on the last Pound of income received", expressing it as:

"A person’s marginal tax rate is the proportion paid in tax of each additional income unit received at their highest level of income"

jem16 wrote: »

Perhaps the correct use should be encouraged.

If you really wish to encourage the correct use then I will be happy to continue to point out that you and kidmugsy are using incorrect definitions and that the correct definition is the one used by me, molerat, the Financial Conduct Authority and the Financial Times among others.

"3.1 In CP15/7 we noted that, from April 2015, individuals aged 55 and over would be able to withdraw savings from their DC pensions as they wish, subject to their marginal rate of income tax."

I won't bother to quote from the FT unless you really don't believe that it's also using the term just as we do. In which case I'll just go and provide some quotes from their stories in recent week that have used it that way, while I read none that used it as you and kidmugsy would have it used.

Yet I have no difficulty in accepting that there are contexts in which the term is used differently. I'm not an accountant bound by the definitions used in accounting practice, though, rather I'm more affected by what is used in the context of UK pensions discussion and there, sadly for those who prefer what may be the accepted accountant's definition (I've no opinion on whether it is, or is in all contexts or some), the FCA and FT seem to be rather more authoritative about how it's normally used.

jamesd

mgdavid wrote: »

I think we should all agree to ban the use of 'marginal rate' :-)

jem16 wrote: »

Totally agree on that one. Far better to say that pension income is taxed just as normal earned income.

In this, at least, we three are in agreement. Perhaps we can enlist kidmugsy and molerat also?

I doubt that we will be able to enlist the FCA and FT but at least we can avoid confusion here.

kidmugsy

jamesd wrote: »

I wasn't aware until this topic that kidmugsy was trying to get others to use it only in the way kidmugsy likes..

It's not a question of what I like, it's a question of an absolutely standard usage in economics and cost accounting, where "marginal" is used to mean "at the margin". Any other usage just introduces muddle and confusion.