Paying £2880 into pension when retired

moneyfoolish

JohnB47 wrote: »

Just one last question on this old but very useful thread.

You said "you can do virtually the same with drawdown if you take the 25% tax free amount each year and withdraw the taxable money whenever you want..."

So, using the drawdown route, can you take 25% of the fund, each tax year?

I thought, with drawdown, you get one chance to take 25% of the fund tax free, then everything else taken out is liable to tax, for that tax year and all future ones.

Ta.

Perfectly describes by jamesd and ermine. In fact, as an example of the 2 situations, we have recently opened a SIPP account in tax year 2016/17 for my wife (who is a non-taxpayer with her only income being a state pension plus a small amount of investment income) and have input £2880. The top up to £3600, I think, will only occur in tax year 2017/18 and not until after we have added another £2880 at the start of the tax year 2017/18. Once both top ups have been added she will withdraw £1800 from the accumulated £7200 (25%) and the rest of the fund will move into drawdown. The amount she will withdraw from the drawdown fund (which is taxable) in 2017/18 will depend on how much she can withdraw totally tax free according to her tax code. From tax year 2018/19 onwards she will add £2880 at the start of each tax year which will be rounded up to £3600 in the same tax year and she will then withdraw £900 (25%) immediately and the rest will be added into her drawdown account and she will again withdraw as much as she can totally tax free according to her tax code. Once she reaches 75 and can't add any more money into her SIPP, she will just withdraw as much as she can tax free according to her tax code until there is nothing left in the drawdown account. She would like to withdraw the money from the drawdown account each year as one payment but it would then be taxed under an emergency tax code but jamesd has advised that if a small amount was draw monthly then HL would be sent the correct tax code. I'm wondering if that would be the same situation if only a small lump sum (say £10) was withdrawn from the drawdown account soon after the 25% tax free amount has been taken and then a larger lump sum was taken at the end of the tax year? i.e. would 1 small lump sum withdrawal from the drawdown account prompt an accurate tax code being sent to HL from the Tax Office?

Sipowicz

Moneyfoolsh, that's exactly what I'm doing with my wife's SIPP, even down to the £10 hopefully generating a tax code from the tax office.

Dazed_and_confused

moneyfoolish

As your wife doesn't have an existing pension (the state pension doesn't count here) the small initial payment will facilitate the provision of a tax code and then a larger payment can be drawn down but you are correct that it would have to be taken at the end of the year to avoid unnecessary tax taken up front.

It would be different if she was only taking some of the maximum income available according to her tax code. For example tax code allows £6000 without tax having to be deducted and wife only wanted to draw down £4000 then she could take this in the eighth month of the tax year (Nov 6 to Dec 5) without having tax deducted by the pension company

jamesd

£10 taken will cause them to be registered with HMRC a few weeks later and after that HMRC will send them a tax code. Once they have it you can take the rest.

If there is no tax code and you take a lot near the end of the tax year it won't be long until you get a refund after telling HMRC about your income via your personal tax account online. So matters less then.

moneyfoolish

Sipowicz wrote: »

Moneyfoolsh, that's exactly what I'm doing with my wife's SIPP, even down to the £10 hopefully generating a tax code from the tax office.

Excellent. I'd be interested to know how long after you draw the £10 it takes the tax office to give your wife a code.

moneyfoolish

jamesd wrote: »

£10 taken will cause them to be registered with HMRC a few weeks later and after that HMRC will send them a tax code. Once they have it you can take the rest.

If there is no tax code and you take a lot near the end of the tax year it won't be long until you get a refund after telling HMRC about your income via your personal tax account online. So matters less then.

As my wife's tax status will never change, once the tax code is initially given to HL, is it maintained (or altered according to any tax rule changes and allowances) for the the following years or is an emergency code used each year for the first withdrawal from drawdown?

Dazed_and_confused

It shouldn't be an emergency code in the second or subsequent years but the way PAYE works would mean a payment drawn earlier in the year is more likely to be taxed

If wife's tax code allowed 6000 without tax that is 500/month which builds up over the year to 6000 by the final month of the tax year so if she took 6000 in April she would normally pay tax on 5500 as the PAYE system would assume she was going to get 72000 that year

hogweed

First of all, I want to thank everybody who has put so much into this thread in an effort to help people like me who have no financial expertise. My situation is perhaps a little unusual so, having read through hours’ worth of this and other threads, I THINK I understand… ish… but hope someone will be kind enough to comment on my calculations, as I’m prone to committing howlers, especially when my life depends on it.

I am 62, currently working for the NHS, so will draw their pension when 65. Said pension is not very big, as I only earn £16,000 a year. However, I had planned to retire to N Ireland when 65, manage somehow for a year, then get my state pension too when 66, and be reasonably OK financially – I don’t spend much

The plan has had to change for various reasons, and I’ll be retiring early, some time around August this year. I can do this because the difference in what I’ll get for my house in England, and a similar one I’ll buy in NI, is potentially £50,000. Take away moving expenses etc and I should have £40,000 to live on for 2½ years (simply by spending the cash – no interest or other complications, as it seems practically impossible to earn any nowadays).

So – my question. My current annual salary is £16,000. If I pay that amount into a SIPP (I have that amount of cash in savings) before 6/4/17:

1. The government will make it up to £20,000 – correct?
2. And I can then withdraw £5,000 as a tax free lump sum?
3. Of the £15,000 left, I can withdraw £11,000 without being taxed, as that is equivalent to my PA, and I won’t have any other earnings, as I’m purely going to be living off my cash?
4. After a year, I can close the SIPP without penalty?
5. In each of the two years 2018 & 2019, when I will have no earnings, I can still pay £2880 (from the house proceeds) into a new SIPP (I’m guessing you have to do this each year, rather than just using the old one?), and will receive a £720 prezzie from the government each year for doing so?

Or am I wrong about the £16,000…? My net earnings are about £13,200…


Thanks, very much appreciated

Dazed_and_confused

You are wrong about taking £11000 without being taxed. As you are earning £16000 tax would be due on the entire £11000.

This may differ depending on when you take the £11000 but you have given no specifics as to when that would be and the reference to £11000 presumably relates to the current tax years personal allowance.

From what you have said you would need to wait until 06:04:2018 before £11000 was likely to incur no tax.

By that point however it may be possible to take £12000 and pay no tax if you genuinely have no other income in that tax year (2018:19) as the personal allowance is on an upward trend, £11500 for 2017:18 and more after per Conservative election promises

hogweed

Dazed_and_confused wrote: »

You are wrong about taking £11000 without being taxed. As you are earning £16000 tax would be due on the entire £11000.

Sorry - no matter how many times I check what I'm about to post, it's always obvious afterwards I've made something less than clear!

After the current FY, I will have no income, and will be living entirely off the capital I raise from selling my house (actually I might continue to earn for 2-3 months, in which case obviously I'd subtract that from the calculations).

Thanks