Taking my pension in one lump sum.

stoddy2k01

Hi.
Just a question.
I'm 55yrs old and in a position to get access to my pension with the new ruling.

My question is this, My pension pot lets say stands at £43000. Now am i right in thinking i can take 25% of this Tax free and the remainder would be taxed @ 25%.

Also as i have been unemployed for 8Yrs and do not intend to work anymore (Hypothetically) would i be able to claim the Tax back i have to pay or not.

Also if i decided to take the whole £43000 as one lump sum would all the £43000 be subject to the 25% or would they set 25% aside then tax the remainder. I'm just looking at my options and i am in the dark with this.

Thank you in advance.

TadleyBaggie

Any income at all (JSA etc)?

Assuming no other income, then 25% (£10,750) would be tax free. If this was done after April and you have the normal personal allowance, the first £11K of income would be tax free, so of the remaining £32,250 you would only have to pay tax (at 20%) on £21,250, i.e. £4250. So after all tax you should end up with £38,250.

Not sure why you think you could claim the tax back, not earning for 8 years doesn't make any difference.

FatherAbraham

stoddy2k01 wrote: »

My question is this, My pension pot lets say stands at £43000. Now am i right in thinking i can take 25% of this Tax free and the remainder would be taxed @ 25%.

No, not quite.

25% would be tax free, that's £10,750.

The remaining £32,250 would be regarded as taxable income, and added to any other taxable income you have enjoyed in this tax year, and then tax applied -- that's how much tax you would OWE.

However, PAYE, as applied by pension providers, doesn't take that into account -- the £32,250 will probably be subject to PAYE on the month-0 basis, and treated as if you would be receiving that much income every month.

You'll get the over taxed money back eventually, but one shouldn't count on receiving everything due until the end of the tax year.

stoddy2k01 wrote: »

Also as i have been unemployed for 8Yrs and do not intend to work anymore (Hypothetically) would i be able to claim the Tax back i have to pay or not.

You'll be able to claim back overpaid PAYE at the end of the tax year; you won't be able to claim back tax which is properly due.

stoddy2k01 wrote: »

Also if i decided to take the whole £43000 as one lump sum would all the £43000 be subject to the 25% or would they set 25% aside then tax the remainder. I'm just looking at my options and i am in the dark with this.

Thank you in advance.

One quarter can be paid out free of tax; the rest would be subjected to PAYE on a month-0 basis.

Income tax basic rate is 20%, not 25%. If you have too much income in a tax year, the higher rate of 40% will apply to the part exceeding the threshold.

Warmest regards,
FA

FatherAbraham

FatherAbraham wrote: »

However, PAYE, as applied by pension providers, doesn't take that into account -- the £32,250 will probably be subject to PAYE on the month-0 basis, and treated as if you would be receiving that much income every month.

Uh, sorry, not "month-zero basis", but "month-one basis".

I'm getting mixed up with "day-zero vulnerabilities".

Warmest regards,
FA

jamesd

stoddy2k01 wrote: »

My pension pot lets say stands at £43000. Now am i right in thinking i can take 25% of this Tax free and the remainder would be taxed @ 25%.

Use this Scottish Widows lump sum calculator and look at the detail of how the tax is calculated.

You would be able to reclaim the extra tax you will be charged. See this HMRC page and pick the method that applies to you.

However, you only overpay the tax because the pension provider doesn't have a tax code for you. So you can work around this by taking a smaller amount, say using UFPLS (the mixed tax free and taxable partial pension pot lump sum method) and waiting until HMRC has send them a tax code, then taking the rest.

You should also plan to pay £3600 gross, £2880 net, into a pension each year. You get the pension tax relief of 20% (25% added to what you pay in) even though you won't necessarily have paid any income tax on the money. Then you can take out 25% tax free and the remaining 75% taxed, making a tax gain on the deal.

atush

If you arent working, I think it would be a far better idea to take the 25% TFLS, then take 11K per year and pay no tax at all?

stoddy2k01

Thanks for all the advice People. i'm most grateful to one and all. I just wondered with not signing on nor claiming any benefits how i stood.

atush

But if you take the pension, the money will affect any benefits you might claim. So it might be better not to claim it?

Are you thinking of getting work?

stoddy2k01

My wife gets her pension in 8 yrs time and we want to pay off existing debt etc and this option is best for us.

I don't claim any benefits at all. I just get the child benefit for our 8 yr old daughter to protect my state pension.

I don't plan to get any full time work no. Not at this moment it's just that we need an ex amount of £££'s to clear something and obviously the more we get the better it will be.

Everything is based on our current circumstances.

jamesd

If you say more about the debts we might be able to suggest a less costly way to do it.

One key thing to do is remember that the new tax year is close. You can probably save significant income tax by splitting this and doing part in this tax year and part in next. This way you will get your tax free personal allowance for two years, not just one, protecting another £10k or so from any income tax bill. It's really unlikely that you'd pay 20% interest on any borrowing over just a couple of months but you can save that much income tax by waiting a bit for part of it. You can save at least £2,160 in income tax less the interest cost of the debts this way, a big saving for someone who's not working!

Pretending that you have no other taxable income, here's how the tax due would work doing it one one big chunk vs splitting it into some soon and the rest after 6 April:

One chunk of £43,000. Take 25% tax free lump sum of £10,750. £32,250 left in the pension. £10,600 of that is your personal allowance and also tax free, leaving income tax due on the remaining £21,650. After claiming the refund you'll have paid £4,330 of income tax.

Now two chunks.
First chunk now, take the 25% tax free lump from the whole pot, £10,750 and the rest into flexible drawdown. Take half of the £32,250 now, £16,125. £10,600 is personal allowance and tax free leaving income tax due on the remaining £5,525. That's £1,105 of income tax.
Second chunk from 6 April you take the remaining £16,125. £10,800 is the personal allowance next year and tax free, leaving income tax to pay on £5,325, £1,065.
Total income tax due on the two chunks is £1,105 + £1,065 = £2170.

Income tax saved by splitting is £2,160. Better in your pocket than HMRCs!

stoddy2k01

Thanks Jamesd.
I'm not in a position to draw my pension until July which is when i am 55yrs old but i do understand where your coming from on that.