Pension pots and tax

binnie

Hi,

My husband in August will be 55 and has two pension pots. One is £19,400 and the other is £5,000
He currently gets a private pension of £8,304 a year.

What we want to know is, if we take £11,000 from the £19,400 and the rest from it the year after, how much tax will we pay and how does the first 25% tax free work out?

We are thinking of taking some in August/Sept approx £11,000 but that has to include the tax we pay out, and the rest of the £19,400 next year after April 6th.
Then the £5,000 April 2018

Any help please?

We want the first £10,000 - £11,000 for house improvements.

xylophone

https://www.pensionwise.gov.uk/?gclid=CMCqv8Cjp80CFSGD2wodHtAD7Q

Your husband could make an appointment to discuss.

Is the pension he is currently receiving his only income other than savings income?

Does he have any savings income?

Is he still contributing to a pension?

jamesd

Up to 25% is available as a tax free lump sum and it's usually the full 25% that is taken. So a typical sort of approach would be:

1. Combine the 19,400 and 5,000 at one place for simplicity and possible cost reduction.
2. Take a 25% tax free lump sum from the combined total of £24,400, so £6,100 of tax free lump sum available.
3. Taking any money from the remaining £18,300 will reduce the amount he is allowed to pay into personal or work defined contribution pensions to £10,000 a year. Do not take any of it if this will be harmful. Taking the tax free lump sum doesn't have this effect.
4. The money taken out of the £18,300 is normal taxable income in the tax year in which it is taken. If his total taxable income for the year is 8,304 and he has the normal personal allowance of £11,000 for this tax year he can take out 11,000 - 8,304 = 2,696 more and still have no net income tax bill, though he would probably have tax deducted and have to reclaim it via the simple forms at his online Personal Tax Account. That's £11,000 tax free so far and that meets your 11,000 target with no tax due.

If you are not a tax payer and have personal allowance available you could transfer £1,100 of your personal allowance to him to increase the amount that he can take out tax free by another £1,100.

If more than this might be needed it's probably better to use a 0% for purchases credit card deal to spread the spending over several tax years so he can spread out taking the money out of the pension to use several years worth of unused personal allowance.

binnie

Hi, I forgot to mention that he is retired so not earning any income from any form other than the private pension. He has also stopped paying into any pensions

His other pensions, £19,400 and £5,000 are with the same company but are seperate pensions.

I'm really sorry I still don't understand what you mean. It's very complicated.
Maybe we need a financial advisor, like the above person posted the link to.

I work for myself, self employed and usually only earn about £4,000 a year so not liable for tax.

Also we want the £11,000 for home improvements, plus his annual pension as we need his private one to live off for bills etc.
So it's the £11,000 we want besides the £692 a month, that can't be touched as we need all of that.

xylophone

Maybe we need a financial advisor, like the above person posted the link to.

Pension Wise are not IFAs but will explain options - see link.

You could transfer £1100 of your personal tax allowance to your husband.

See https://www.gov.uk/marriage-allowance/how-it-works

You would sort this out first.

This would give him unused tax allowance of £3799.

He could transfer both the £19400 and the £5000 to a SIPP with Hargreaves Lansdown.

He could draw £6100 as a Pension Commencement Lump Sum which would be tax free.

He could request the balance of the money required as a drawdown for 2016-17.

He would only owe tax (at 20%) on £1101, but initially tax would be deducted on an emergency month 1 basis - your husband would reclaim the overpayment from HMRC.

https://www.gov.uk/claim-tax-refund/you-get-a-pension

This would leave him with cash in the SIPP.

In the tax year 2017-18, the standard Personal Allowance will be £11,500 but this could increase to £12650 for your husband if you have transferred the Marriage Allowance.

He might then set up a regular monthly payment from the SIPP of say £360 a month for the year 2016-17 - by that time HL should have received a tax code for your husband which would permit him to receive this tax free.

In the following tax year (2017-18) he could increase this slightly as the Personal Allowance increases - and similarly in later tax years until the money was used up.

Otherwise you could transfer the Marriage Allowance as above, and your husband would move the £19,400 into a drawdown arrangement if the provider permits.

He would take the tax free PCLS (£4850) and request the balance required as drawdown for the current tax year.

Initially he would be overtaxed but he would reclaim from HMRC as above.

He could drawdown enough over the next couple of years to keep him a non-tax payer.

He could then take the £5000 pension - £1250 as a PCLS and the rest as a lump sum which by that time with increasing Personal Allowance will probably be tax free but would be taxed on Month 1 basis so he would reclaim as above.

binnie

Thanks for your replies. Sounds very complicated I must say.

mgdavid

binnie wrote: »

Thanks for your replies. Sounds very complicated I must say.

if you're not familiar with the tax treatment of pensions and the terminology / jargon then it can seem strange at first.
Put simply you are playing 'put and take'. The good bit is that you put a bit, and take a bit more back. The extra bit is free money, and it's hundreds and sometimes thousands so well worth the effort..

binnie

When you say you can reclaim the overpayment of tax, how long does it take to get the refund?
Can you claim straightaway once they have taken the money, or do you need to wait until a new tax year

jamesd

You can claim immediately and if the claim form available at the online Personal Tax Account is used the target time for HMRC to pay is 30 days.

binnie

Thank you to everybody who has taken the time to reply to me.
I will take this onboard and read it all again and try and take it in.
Will also ring that helpline and see what they can advise too.

binnie

Since I started this thread, my husband has been told he can't cash in the £5,000 (AVC). But he can get £1,172.93 tax free and has to put the rest in an Annuity with someone of our choice. We are going for Hargreaves Lansdown. Thing is it only brings in £100 ish a year, we really wanted to cash in the lot but it doesn't look like it.

The other £19,088.98 we can cash in, but the figures quoted are
£917.42 Tax Free Personal allowance
£2,666.67 Basic rate tax 20%
£9,833.33 Higher rate 40%
£899.32 Additonal rate tax 45%

We are confused why he is paying the higher rates as he only has a private pension income besides this of £692 a month

If they take the money, will he get the tax back. Why do they take that higher amount in the first place assuming all people earn lots of money