Going to be claiming Housing Benefit when I retire- worth having employers pension?

Comstock

HappyMJ wrote: »

if you bought a house you wouldn't get housing benefit....

.

Yeah I realise that. It was a more general question. I can only take 25% of the pension for a one off payment (but it is tax free)?

Have I go that right?

jamesd

Comstock wrote: »

I can only take 25% of the pension for a one off payment (but it is tax free)? ... Have I go that right?

Not quite. You can take it all.

25% is the tax free lump sum.
The rest is added to your normal taxable income in the tax year(s) in which you take it.

There's a bit of a quirk if you take it all as a lump sum because the taxable 75% is taxed as if you were going to get the same amount every month, so you have to ask for a refund from HMRC. Or you can take a bit, wait for the pension provider to get a tax code from HMRC, then take the rest.

What tends to be a good idea is spreading out the taxable part over two or more tax years so you don't end up paying any higher rate income tax.

Ignoring that quirk:

1. worth 40,000, 25% tax free lump sum is 10,000 and the other 30,000 is taxable. Take the whole 30,000 and you'd be just about into higher rate income tax band so a little of it would be taxed at 40% instead of 20%. Not most of it, most would be at 20%.

2. so find out the higher rate threshold, subtract your work income and take out only that much from the taxable part in the first year and take out the rest in the next one and you only pay 20% on the whole of the taxable 75%.

atush

Comstock wrote: »

OK thanks everyone.

One last question. Have I understood this correctly- the money I save, I can get 25% at any point after 55, as a one time only deal, and the rest goes to buy an annuity when I retire which pays a fixed percentage per year for the rest of my life. So I couldn't, for example, buy a house (if my fund was big enough, which I doubt) with the whole lot?

Have I understood that correctly?

again, no you dont have any idea of pensions correct. i assume because you dont want to and are attracted to those who dont like pensions.

as you have "Liked" Hardcore and anyone else who will agree with your blinkered view, and have denigrated anyone who disagrees with you (even those who are NOT calling you a scrounger).

You have not once, thanked anyone who tried to explain to you why a pension was a good thing. Not one, even those of us who tried to help you and did not insult you.

AS to answer your question, no you DONT have to buy an annuity. Although, as in your blinkered case i would not assume an annuity was the wrong thing to do in your case. AS it pays you a guaranteed amount, every year, forever until you die.

Other options include- taking the remaining 75% as cash and pay a sh*tload of tax on it, or draw it down slowly- using your personal allowance to pay no tax at all.

i would not take the odds on you doing the wise thing, given your comments here to those trying to help you.

jamesd

Comstock wrote: »

I can get 25% at any point after 55, as a one time only deal, and the rest goes to buy an annuity when I retire which pays a fixed percentage per year for the rest of my life. So I couldn't, for example, buy a house (if my fund was big enough, which I doubt) with the whole lot?

The requirement to buy an annuity was removed in 2006 when something called Alternatively Secured Pensions were introduced. Until 6 April 2015 there were limits on how fast out could take the 75%, via something called the GAD limit that at youngish ages limited you to about 6% a year.

From 6 April 2015 those restrictions were removed and you can take it all out as quickly or slowly as you like. Got a million in there, you can take it all out your 55th birthday if you want to. Or take 100,000 a year, or 500,000 then 50,000 a year or any other combination you like. Just 25% as the maximum tax free part.

Lets pretend you have 80,000. You can do things like this, any of them:

1. Take out all 80,000 at once. 20,000 is a tax free lump sum, 60,000 is added to your taxable income for the tax year and that means that about 30,000 would be taxed at basic rate and about 30,000 at 40% rate.
2. Take out 20,000 tax free lump sum and put the remaining 60,000 into what's called flexible drawdown. You can take the money from flexible drawdown whenever you like. Say 5,000 a year or 30,000 in one tax year and 30,000 in the next so you only pay basic rate income tax.
3. Take benefits from 40,000, 10,000 tax free lump sum and 30,000 taxable. The remaining 40,000 is still "uncrystallised" meaning that you're still entitled to take a tax free lump sum from it. You can take that all at once, (10,000 tax free and 30,000 taxable) or in 10,000 a year chunks (2,500 tax free, 7,500 taxable) or whatever other amounts you like.

Pension providers track how much is crystallised (has had lump sum taken) or uncrystallised (hasn't) so you can only take out the tax free lump sum amount you're entitled to.

So you really do have the chance to use the whole amount, after income tax on 75% of it, to buy a home or any other high price thing if that's what you want to do. Or you can do things like topping up savings to the limit for any benefits you're getting.

Labour, Conservative and Liberal-Conservative coalition governments have participated in reducing the restrictions on taking pension money so it's likely that these or something even more flexible will still be around later. Not any guarantee where politicians are involved, but it's likely.

This nearly total flexibility is a big part of why it's really hard for you to lose and why I think that with investment growth there's a pretty good chance that you really will be able to buy a place of your own.