Cash in Small Pension

Blue_Parrot

My husband has two private pensions. One is very small, the other is not. He will work beyond 'retirement age' which he hits this year.

We are intending to cash in the small pension (about £23,000). The other pension (the much larger one) will continue with monthly contributions as long as he is working. We haven't decided what to do about that one yet, and don't need to.

I had a long chat with the smaller pension firm today. The first 25% will be tax free (£5,894) and the remainder (£17,682) will be taxed. Ok, got that. But she became increasingly uneasy and eventually said the remainder will not be taxed at his current 20% band but at the Emergency Rate and it's up to us to reclaim the extra tax which will have already been paid to the revenue before they send us the balance. Then there's the messing-up of his tax code.........

We wanted this cash lump sum for personal reasons having just had the most stressful year of our lives. It is not to repay debts and we are mortgage free.

I'm now wondering if taking the whole lot (which would seem to be about £18,000) is a Really Bad Idea from a taxation point of view. Or on the other hand to deal with the letter-writing hassle and go ahead with our plans anyway.

ps. This is probably a stupid question, but I don't understand why releasing funds from a small pension fund should be regarded as "income" and taxed as such; whereas the payout from an insurance policy (a much larger amount) is not regarded as income at all.

pps. apologies if I have posted confusingly, and if this question has been asked before

mania112

Emergency Tax is 20%, and he'll likely pay more than that - so that information isn't quite right.

It will likely be taxed at 40%, but maybe even 45% - this on the amount after tax free cash is paid.

If that turns out to be an incorrect tax payment (it will be added to your top rate of tax) then you can have a rebate after the tax year end.

Blue_Parrot

Does anyone know if, take 25% tax free is per tax year or per calendar year?

If it's per tax year, does the claim date from the date of filling in the form, or the date it is paid? There is a little under a month remaining on this tax year. It occurs to me that we could take 25% 'now' = when the forms arrive, and another 25% later in April.

Or is that simply wishful thinking?

dunstonh

Does anyone know if, take 25% tax free is per tax year or per calendar year?

It is 25% of the uncrystallised benefits that you choose to crystallise.

So, if you have a pension that has no crystallised element and you take 25% of that, then you cannot take another 25% tax free again against that portion. If you crystallised half the fund and took 25% against that half then you can do the other half in a future year.

if you have a fund of £100k, then you could do £10k a year of which each £10k would have £2500 tax free.

If you crystallised the whole £100k and took £25k then there is no more tax free to be had.

Blue_Parrot

Boy oh boy is this confusing. I had to look up crystallised and uncrystallised funds. So therefore, you can only take 25% tax free, once. One time. Right?

The other confusing part is the havoc is plays on your tax code.

The problem of emergency tax being taken arises because HMRC systems will treat withdrawals from a pension scheme as the first of ongoing monthly payments.
They are placed on tax code '1000L M1' - the 'M1' stands for 'month one'.

Source: http://www.thisismoney.co.uk/money/pensions/article-2966766/Savers-using-pension-freedom-warned-pay-emergency-tax.html

Further down that article, it says:

To get the overpayment back, they need to fill out an HMRC repayment form - a P50 form if your only other source of income is the State pension, or form P53 if you have other sources of income. Repayments can take six weeks.

Six weeks compares with mania112's reply of "....you can have a rebate after the tax year end"

JuneAB

You can take smaller sums known as an UFPLS - each sum you take out is 25% tax free and 75% taxable

You can put it into drawdown and take a 25% tax free lump sum and draw the rest as and when you want. This is a flexi access drawdown

If you cash it all in you will be taxed at 45% of it. Which may initially be up to 45% but then you can claim a refund if you have overpaid. HMRC say this will take about 6 weeks.

You will be restricted on how much you can contribute in the future to other pensions.

Really depends on his income as taking it in one go can push him into a higher tax band so doing UFPLS you can spread it over tax years

maximumgardener

why don't you look at combining the two pensions onto one platform . ?

i.e. rather than have them with separate companies.

that should make your "management" much easier .

(you probably will need services of an IFA? thats your call)

kidmugsy

Blue_Parrot wrote: »

The first 25% will be tax free (£5,894) and the remainder (£17,682) will be taxed. Ok, got that. But she became increasingly uneasy and eventually said the remainder will not be taxed at his current 20% band

(i) The £17, 682 will be taxed as income. If that takes your husband over the threshold for 40% tax then part of it will be taxed at 40%. The way to avoid that is to drawdown a small enough amount each tax year that your husband's income remains in the 20% tax band. That's easy.

(ii) Next: The way to avoid an emergency tax rate is apparently to drawdown a modest amount first, then wait for the provider to be supplied with a tax code by HMRC, then take out as much more as you want, subject to (ii).