Tax Logic Check Please

DancingBadger

I'm currently deferring my SP (since November '13). I stopped working just before Christmas '15 and my only income is from two small final salary schemes.

OH and I both accessed our private pensions last year and took roughly half of the PCLS available, but nothing since then.

OH is still working on a freelance basis and pays tax, NI, etc on his variable income.

I have it in my mind, but haven't worked out exactly how, there's a tax (and future income) advantage by continuing to defer my SP whilst taking some money from my private pension. Am I right?

Linton

DancingBadger wrote: »

I'm currently deferring my SP (since November '13). I stopped working just before Christmas '15 and my only income is from two small final salary schemes.

OH and I both accessed our private pensions last year and took roughly half of the PCLS available, but nothing since then.

OH is still working on a freelance basis and pays tax, NI, etc on his variable income.

I have it in my mind, but haven't worked out exactly how, there's a tax (and future income) advantage by continuing to defer my SP whilst taking some money from my private pension. Am I right?

I cant see the tax advantage of deferring the SP unless it avoids crossing a tax band. Any income above your alllowance and the PCLS is taxed in the same way whether it's SP or an annuity or pension drawdown.. However there is a major income advantage over the long term as the 10% annual increment from deferring your SP is very generous given current life expectancies.

kidmugsy

DancingBadger wrote: »

I'm currently deferring my SP (since November '13). I stopped working just before Christmas '15 and my only income is from two small final salary schemes.
...
I have it in my mind, but haven't worked out exactly how, there's a tax (and future income) advantage by continuing to defer my SP whilst taking some money from my private pension. Am I right?

Is the 15/16 income from the small pensions, plus your 15/16 earnings, enough to make you a taxpayer in 15/16? If so it would be best to continuing to defer IF the small pensions on their own won't make you a taxpayer in 16/17. Because then in 16/17 you can withdraw taxable income from the personal pension, and by keeping your taxable income below the Personal Allowance (£11k) you'll avoid income tax altogether for 16/17. To avoid the hassle of paying tax and then having to reclaim it, the trick is - I understand, from other commenters here - that you should start off your drawdown with a modest amount, so that hmrc will supply your provider with a tax code that reflects your non-taxpayer status, and then you can drawdown more once that tax code is in place.

If £11k isn't enough for you to live on in 16/17 you can always drawdown some more PCLS. In fact, you might be wise to draw more PCLS soon, so that you can make a contribution to your personal pension in 15/16 (perhaps depending on what the Chancellor announces in his Budget on March 16th), limited by the amount of your earnings in 15/16, less the increase in value of your FS pension shemes in 15/16, and less any contributions you made to your personal pension in 15/16.

Similarly you might want to make pension contributions in 16/17. If you will have no earnings you'll be limited to £3600 gross (£2880 net). Again, the wisdom of that is dependent on Mr Osborne's latest wheezes.

So the idea is to keep taking taxable drawdowns from your personal pension, year after year, until it is exhausted (even in the face of your replenishments). Then you can aim to start your State Pension. It should be, in part, tax-free too. OR, you might be subtler. Aim to take your State Pension when it and the two FS pensions will use the Personal Allowance up, and keep any money left in the private pension as an emergency reserve.

As Linton said, the Extra Pension is wonderful value, so it might be wiser just to keep deferring for as long as seems wise e.g. if your health is good, for a total of (say) five years.

There is even another stunt available. if you take the deferred pension money as a lump sum instead of an Extra Pension, you can get it tax-free if you take it in a year when your other income is less than the Personal Allowance. Then you could defer the pension a second time, this time building up a few years worth of Extra Pension. But you'd have to be careful to ensure that your taxable income didn't stray over the Personal Allowance, even by a pound, because then you'd have to pay 20% tax on the lump sum.

DancingBadger

Thank you both - lots to think about now.

I won't pay any tax in year 15/16 and am working on not paying tax in 16/17 either.

The job was only part-time and by leaving in December I've just managed to scrape in under the £10600 threshold for 15/16. When I stopped working I was handed a MARS payment and also the lump sum from my small DB pension - both tax free and enough to cover living expenses for OH and me for the next 12 months at least.

I'm not keen to start claiming SP before I need it and just wanted to make sure I'm covering all bases in terms of sensible use of tax allowances.

polymaff

DancingBadger wrote: »

....

Just for guidance, tax-planning and changes to deferral apart, you won't benefit from deferral until you've been drawing your SP for just less than 10 years.

How's your crystal ball working?