Full pension withdrawal avoiding 40% rate

webtrekker

Hi. I have a pension with Royal London with a pot of around £62,000.

The pension has a Guaranteed Annuity Rate. I have been to see an IFA with regard to taking 25% tax free then shifting the rest into a drawdown plan. The IFA has been unable to suggest a decent plan as he says the GAR is really good.

However, the annuity will only pay me about £250 a month and ends when I die (I'm 64 now). So, I was thinking of taking the WHOLE pot as a lump sum. This would, of course, have to take into account my Self Employed earnings regarding tax. I then thought that, if I stopped working from April 6th this year and took my pension pot in April I might then fall below the 40% bracket for this year, giving me £15,500 tax free and £46,500 taxable which, taking my £11,000 Personal Allowance into consideration, would leave £35,500 to pay tax on, which is well below the threshold for the 40% rate.

Am I right in thinking this might work? Also, would a huge amount of tax be deducted in April which I would have to reclaim next year?

Thanks.

jamesd

That's £3,000 of income a year from 3/4 * £62,000 = £46,500. So the GAR appears to be 6.45%. Is that inflation linked and if so to what inflation measure? I'm trying to compare it to the 5.8% increasing with CPI that is available from using the money to defer your state pension instead. If the 6.455 isn't inflation linked then deferring your state pension looks like a better buy if you want income that is guaranteed for life.

When does the GAR expire? The reason I ask is that you must show that you took financial advice to take out more than the 25% tax free lump sum portion of a pot with protected benefits like a GAR if the value of the benefit is over £30k. You can then ignore that advice if you want to, the requirement is to take it, not follow it. This requirement goes away when the GAR ceases t be available.

What would you do with the whole pot if you took it all? If you don't invest it, the end result would be worth less than state pension deferral and less than the annuity if you saved the income from those and didn't die younger than usual.

Unless you have a very urgent need for the money it isn't sensible to take it all out. You can save that to a time when you have a lower tax rate instead of paying tax or more tax on it today.

If you just left the money in a pension it'd be inherited tax free if you die before age 75 or taxed at the recipients tax rate after that. That's probably a better deal than you can arrange outside the pension.

What we lack to give good guidance is knowledge of your objectives and need for income, if any. If the sole motivating factor is inheritance then it's best to leave the money in the pension.

The IFA may not be able to suggest a better income plan but there might be one that is better for some objectives and situations, depending on whether the GAR is inflation linked or not.

The 75% is added to your normal taxable income. Given that you are a higher rate tax payer this means that if you took it in one year you would lose some or all of your personal allowance, paying 60% marginal income tax rate on some of the money. You probably would pay more tax than required and have to reclaim some.

While we don't know the full facts it appears that you may be considering an expensive mistake.

webtrekker

Wow! Thank you for such an enlightening reply jamesd. Much appreciated.

I'll read over your reply again and give things careful consideration.

To be honest, the extra money would help expand my daughter's small business, which has been doing very well, so in a way I consider that to be a good investment. I work as a delivery driver for a takeaway at night and the pay is low, I never earn more than my Personal Allowance each year and rarely pay tax. That's why I was thinking that, in order to take the whole pot without being clattered at 4% tax it might be beneficial to just pack in my low paid job, for a year at least, and use this years allowance to reduce the pot to below the 40% threshold.

I will be getting my State pension next year anyway and have been given an estimate of £169 per week by the DWP. I may return to delivery work or help out my daughter with her business in order to top up my State pension if needed as I am in good health and hopefully can continue working for a good while yet.

kidmugsy

webtrekker wrote: »

took my pension pot in April I might then fall below the 40% bracket for this year, giving me £15,500 tax free and £46,500 taxable which, taking my £11,000 Personal Allowance into consideration, would leave £35,500 to pay tax on, which is well below the threshold for the 40% rate.

The 16/17 20% tax band is £32k so £3500 would pay 40% tax. You could just leave that amount in the pension for withdrawal later.

webtrekker wrote: »

would a huge amount of tax be deducted in April which I would have to reclaim next year?

Yes, but apparently you can avoid it by taking out a modest amount at first and then waiting until your provider gets a tax code for you, and then you can take out more.

Malthusian

How would you feel if the day after you invested your pension in your daughter's business, it went bankrupt and you lost every penny?

£250 a month is quite a lot of money if the only other source of income in your retirement is your £676 per month State Pension. A 36% wage increase would make a big difference to most people's lives.

I assume you don't want to work as a delivery driver forever.

webtrekker

The 16/17 20% tax band is £32k

Is that not the amount ABOVE my Personal Allowance though?

mania112

Yes it is above the personal allowance, if it's done next year and your State Pension starts next year then there will be very little allowance to use - the State Pension is taxed first (ie, uses your allowance first).

To answer your question - drawing it all out will put you in immediate higher rate tax because the way PAYE works is on a monthly basis, meaning the system thinks you'll get that same amount each month and work tax out accordingly - would be nice, but not true.

So you'll probably be due a rebate, but this can't be done until after the tax year ends.

I'm sure you could find an adviser who would help you do this - for a fee. The one you spoke to seems to refuse doing it because of the GAR, but it is possible.

AnotherJoe

webtrekker wrote: »

Wow! Thank you for such an enlightening reply jamesd. Much appreciated.

I'll read over your reply again and give things careful consideration.

To be honest, the extra money would help expand my daughter's small business, which has been doing very well, so in a way I consider that to be a good investment.

How would you ever get your investment back though? Would it really be an investment, or a gift?

webtrekker wrote: »

I work as a delivery driver for a takeaway at night and the pay is low, I never earn more than my Personal Allowance each year and rarely pay tax. That's why I was thinking that, in order to take the whole pot without being clattered at 40% tax it might be beneficial to just pack in my low paid job, for a year at least, and use this years allowance to reduce the pot to below the 40% threshold.

Or just take it out a bit at a time in different tax years. Two or three goes would do it.

webtrekker wrote: »

I will be getting my State pension next year anyway and have been given an estimate of £169 per week by the DWP. I may return to delivery work or help out my daughter with her business in order to top up my State pension if needed as I am in good health and hopefully can continue working for a good while yet.

If in good health and you live the roughly 20 years expected at your age, you'd get back £60k from your £45k pot, more if inflation linked. And thats a big increment, as said, on your state pension.

kidmugsy

webtrekker wrote: »

Is that not the amount ABOVE my Personal Allowance though?

Yes; it's above the £11k personal allowance, so the threshold for 40% tax is £43k. So if you have "£46,500 taxable" then you'll pay 40% tax on the last £3,500, just as I said.

jamesd

I don't think that you can really afford to help your daughter's business, your own finances seem too precarious, with not that much income available for you to live on.

A better plan might be something like using just the 25% tax free lump sum to help her and taking the rest as either the GAR or deferred state pension to increase that. We don't know what the GAR terms are - particularly if it's inflation linked or not - so we can't say yet whether that or state pension deferral is the best income deal.

On top of that 25% you'd then be able to choose to do the working you're doing and use that money to help her, with you not being crippled financially if something stops you from working.

webtrekker

kidmugsy wrote: »

Yes; it's above the £11k personal allowance, so the threshold for 40% tax is £43k. So if you have "£46,500 taxable" then you'll pay 40% tax on the last £3,500, just as I said.

I do apologise. I was a bit too hasty in reading your post.

Taking my 25% tax free lump sum then taking the rest in lower amounts over subsequent years is what I really wanted to do, but Royal London doesn't offer a Drawdown scheme and my IFA (from Newcastle Building Society) is dragging his feet because he thinks the GAR is the best offer. So my next question is ...

Do I need a Drawdown scheme to enable me to access the remainder of my pot as and when needed, or will Royal London just retain the pot and allow me to make further withdrawals in future years?

As you can see, I'm really confused by all this! It seems to me that all these wonderful options the Government talk about are nothing but hot air when it comes to actually arranging one. The options offered by Royal London are severely limited.