Cashing in pension & tax.

talexuser

I have a friend with a third small pension pot (~7k) not worth the income. She wants to cash it in for the 25% lump sum, but thinks has to pay basic rate tax on all the remainder. I calculate her remaining two pensions put her ~£1k below the personal allowance next April, and her savings income is below the new limits then (her ISA income doesn't count).

She is adamant that she must pay all of the tax on the remaining 75% of the pension pot (having read that is the rules), and is reluctant to believe me that the £1k of the remaining 75% counts towards her personal allowance and thus is another tax free amount.

However I am unclear how the £5000 savings allowance for low incomes fits into this. Does cashing in a pension come within the scope of this allowance treated like savings interest?

colsten

talexuser wrote: »

However I am unclear how the £5000 savings allowance for low incomes fits into this. Does cashing in a pension come within the scope of this allowance treated like savings interest?

I doubt this comes into it, as it is an allowance on savings interest. It would be difficult to class a pension investment as savings interest.

Does she have to take 100% of the pension in one go, or is she allowed to split the 75% across more than one tax year?

May be ask on the pensions board?

Eco_Miser

The 75% is added to her existing taxable, non-savings, income, and the whole is taxed according to which bands it falls into, i.e. some at 0%, some at 20%,( some at 40%, some at 45%). If she had no earned or pensions income, the whole of her personal allowance would be deducted before paying tax on the remainder.

xylophone

The standard tax free allowance for 2016-17 will be £11,000.

It would seem that her income for the year will be £10,000 (existing pensions) plus £5250 remaining after the deduction of the tax free lump sum - £15250.

Tax due for the year would be 20% of £4250.

However, it is likely that the pension provider would deduct tax on the £5250 on a 1100L M1 basis, meaning an overpayment of tax would occur which she would need to reclaim from HMRC.

http://adviser.royallondon.com/news/pensions/2015/april/emergency-tax-and-lump-sum-withdrawals/

talexuser

Thanks, confirmed as I thought. The best idea is too see if cash-in can be split over the next few of tax years. Maybe not a lot in tax saving but she is only 65 so may be worth her while, particularly if she tops up her ISA with a view to future income.

xylophone

Would it be worth considering transferring this pension to a Hargreaves Lansdown SIPP?

Plenty of information on the HL site.

It seems to me that they are good value for a small SIPP, the staff are helpful and the web site easy to use.

As a non earner, depending on what the Chancellor decides, it might be worth her while contributing (£2800 (£3,600) to the SIPP until she is 75?

Again, there is information on the HL site.

talexuser

I see the point. We are back in the argument if she still has some money she does not need now for day to day, is it better to top up the SIPP idea, or her existing S&S ISA which is still accumulating and not needing an income yet?

The advantage of the ISA is tax free income eventually, the SIPP the top up now for potentially greater growth during the same period but perhaps putting her beyond the tax allowance for income eventually paying some tax instead of none. Difficult one to work out, depends I suppose when you start to take the income, and how much longer you live after that as a taxpayer?

POPPYOSCAR

colsten wrote: »

I doubt this comes into it, as it is an allowance on savings interest. It would be difficult to class a pension investment as savings interest.

Does she have to take 100% of the pension in one go, or is she allowed to split the 75% across more than one tax year?

May be ask on the pensions board?

We are with Equitable life and they allow you to take amounts min £5,000 at a time.


You get 25% of the amount you take tax free each time you take from the fund and they deduct tax from the rest.


So if this falls within your annual taxable income allowance you have to claim it back from HMRC.

kidmugsy

talexuser wrote: »

she is only 65

Is she drawing her State Retirement Pension? She could consider deferring it for a while (e.g. for 16-17) so that she can cash in her little pension tax-free in 16-17, and then restart her SRP in, say, 17-18. Not only would this be tax-efficient, the restarted SRP would be 10.4% bigger.

talexuser

Excellent strategy for similar circumstances kidmugsy, unfortunately she's been drawing state pension for 5 years.

bowlhead99

talexuser wrote: »

Excellent strategy for similar circumstances kidmugsy, unfortunately she's been drawing state pension for 5 years.

But is that 5 years having already had a deferral? If she just took it when entitled and never had a break, she can tell them now that she wants to stop taking it and defer for a while.

That would allow her, not just to more easily fit her taxable personal pension into next year's income tax allowance, but also get a boost to the amount of state pension she receives when she starts taking it again. If she can defer for a year she will get about 10.4% more pension for the rest of her life. And another 0.2% for every week after that. Spending the personal pension and getting 10% a year for doing without the state pension is a far better guaranteed return than whatever she would invest the personal pension proceeds into within a s&s isa.