Tax allowance + State pension

OWAIN

I have a relative who is retiring in January 2016 and is wondering whether she should cash her DC pension in now or wait until after April next year (new tax year). She's not interested in an annuity and wishes to withdraw the full amount but has concerns about the tax implications.

The pension is worth 22k and she will earn approx 15k salary this year.
Next year her income would only be a state pension of approx. £8200

She qualifies for the basic tax allowance of £10,600.

If she chose to withdraw the pension next year, when she is only receiving a state pension, would she receive £10,600 tax allowance from the £8,200 state pension that she will receive? i.e. 10600 - 8200 = 2400. In a manner of speaking, would she be £2400 'in hand' and could she then expect to pay £2400 less in tax on the pension?

xylophone

The personal allowance will increase to £10,800 in 2016-17.

Her state pension will use £8200 of this leaving her with £2,600 to set against the private pension income after deduction of the 25% PCLS.

£16,500 - £2600 = £13,900.

Tax at 20% on £13,900 = £2,780.


However, she may well find that the pension company deduct too much tax and she will need to reclaim through HMRC.

kidmugsy

xylophone wrote: »

The personal allowance will increase to £10,800 in 2016-17.

Her state pension will use £8200 of this leaving her with £2,600 to set against the private pension income after deduction of the 25% PCLS.

She could save tax aplenty by drawing out that amount each year until the pot is empty. Is there a good reason for her haste?

McKneff

How is she going to survive on just a state pension of only 8,200 per year.

xylophone

How is she going to survive on just a state pension of only 8,200 per year.

Well, that's £157 a week and the pension guarantee credit for a single person only tops up to £151.20.......

Apart from that, perhaps she has a spouse/partner?

Or other savings income/ISAs etc?

And she could opt to put the pension into drawdown and draw it out gradually tax free which would supplement SP for a while.

Or she could opt to defer the state pension and live on the private pension until it runs out

OWAIN

xylophone wrote: »

The personal allowance will increase to £10,800 in 2016-17.

Her state pension will use £8200 of this leaving her with £2,600 to set against the private pension income after deduction of the 25% PCLS.

£16,500 - £2600 = £13,900.

Tax at 20% on £13,900 = £2,780.


However, she may well find that the pension company deduct too much tax and she will need to reclaim through HMRC.

That's the answer I was looking for. Thanks.

Thanks to everyone else for the replies also.

atush

I'd like to see the answer to the questions myself.

Why withdraw it all at once and pay all that tax? I'd be drawing it more slowly myself.

xylophone

Re Personal Allowance 2016-17 - even better news

It will be £11,000 - thanks to Pdman for pointing this out.

https://www.gov.uk/government/news/summer-budget-2015-key-announcements