Paying £2880 into pension when retired

Aiki

My interpretation of the information below is that if you only took the tax free lump sum aspect of the £3600, i.e. £900, then future contributions tax relief would not be affected. In your example you were looking to take £2600 hence triggering the change in annual allowance. This may or not be a problem in the future.

At least with this being your only taxable income, all the withdrawal is free of tax so you are making good use of the tax relief



From the Money Advice Service.

Tax relief on future pension contributions

You can set up an income drawdown scheme and continue paying into a pension, but the maximum annual pension contributions you can get tax relief on once you start taking income under drawdown is £4,000 (or the amount of your earnings if it's less). This is down from the usual Annual Allowance of up to £40,000. If you want to carry on building up your pension pot, this may influence when you start taking your drawdown income.
The tax relief you get for future pension savings is not affected if you take the tax-free lump sum but no income.
If you're not earning, you can still get tax relief on contributions up to £3,600.

jamesd

TBC15 wrote: »

Small pots

The tax corrections are right, the money is taxed as normal. The small pot rule withdrawing is not classed as flexible withdrawing so it doesn't trigger the money purchase annul allowance cut to £4,000 a year of permitted defined contribution pension contributions. That's useful for people who aren't completely retired yet.

The £10,000 can be either crystallised or uncrystallised money. To almost maximise the benefit you can take a 25% tax free lump sum from £13,330 and have the remaining £9,997.50 placed into a flexible drawdown account. Then you can use the small pot rule on the £9,997.50.

jamesd

It is the use of UFPLS that triggers the cut for your wife. No restriction if she just takes the tax free lump sum and has the rest go into a flexi-access drawdown account.

She can wait until there's almost £10k in the flexi-access drawdown account then take that using the small pot rule if she likes. That rule also doesn't trigger the cut. She doesn't have to wait but you can only use the small pot rule three times ijn your life on this sort of pension so waiting can be a good move.

bioboybill

jamesd wrote: »

It is the use of UFPLS that triggers the cut for your wife. No restriction if she just takes the tax free lump sum and has the rest go into a flexi-access drawdown account.

She can wait until there's almost £10k in the flexi-access drawdown account then take that using the small pot rule if she likes. That rule also doesn't trigger the cut. She doesn't have to wait but you can only use the small pot rule three times ijn your life on this sort of pension so waiting can be a good move.

I am still slightly confused. My wife already has income from another pension of about £9.3K per year. I was hoping she could take out the £2600 with £650 of that being tax free and the other £1950 being within her personal allowance. I know she would pay tax on it at first and get that back from HMRC. If she withdrew just the £900 (which I think you are suggesting?) and let the rest build up until it was c. £10K when she drew that down wouldn't that put her way over her personal allowance with the pension she already receives and then she would pay a load of tax on it?

xylophone

Is the situation that your wife has no plans to return to paid employment?

If so, then she doesn't need to concern herself about the MPAA.

It seems that all she wants to do is take the PCLS from the SIPP and then as much of the balance (income) as keeps her within her tax allowance for the current year?

Has she spoken to HL on the phone and explained that this is what she wishes to do?

And will she have time to arrange it and take the income within this tax year?

Has your wife obtained a state pension statement?

https://www.gov.uk/check-state-pension

busybee100

jamesd wrote: »

The £10,000 can be either crystallised or uncrystallised money. To almost maximise the benefit you can take a 25% tax free lump sum from £13,330 and have the remaining £9,997.50 placed into a flexible drawdown account. Then you can use the small pot rule on the £9,997.50.

Thank you for that James.
When would tax be paid on a small pot? Would it be declared on a tax return rather than deducted on withdrawal?

jamesd

It'll still go through the pension PAYE scheme and be taxed before being paid.

jamesd

bioboybill wrote: »

My wife already has income from another pension of about £9.3K per year. I was hoping she could take out the £2600 with £650 of that being tax free and the other £1950 being within her personal allowance. I know she would pay tax on it at first and get that back from HMRC. If she withdrew just the £900 (which I think you are suggesting?) and let the rest build up until it was c. £10K when she drew that down wouldn't that put her way over her personal allowance with the pension she already receives and then she would pay a load of tax on it?

I was thinking that she might want to use the small pot rule to avoid having the £4,000 a year cap on pension contributions, but also get out as much money using the small pot rule. You're right that this would increase the tax cost so it may not be the best choice.

She could take the £900 and use the small pot rule n the £2700 if she wants to.

bioboybill

jamesd wrote: »

I was thinking that she might want to use the small pot rule to avoid having the £4,000 a year cap on pension contributions, but also get out as much money using the small pot rule. You're right that this would increase the tax cost so it may not be the best choice.

She could take the £900 and use the small pot rule n the £2700 if she wants to.

There's no chance she will work again, and this is the only pension contributions she will make each year, so is she ok to take the £2600 as is being suggested and repeat each year? Except take the whole £3600 next time and leave the £1K as cash?

where_are_we

You are correct - take a UFPLS of £2600 before 6th April. £650 will be tax free and £1950 will be taxable. Your wife`s income for this tax year will then be £9300 + £1950 = £11250 which is less than her personal allowance of £11850 for this tax year 18 - 19 . HMRC will probably take a small amount of tax but she can claim this back. Next tax year she should contribute £2880 to which HMRC will add £720 making her HL SIPP worth £4600. She should take a UFPLS next tax year 19 - 20 of £3600 - £900 tax free and £2700 taxable. The personal allowance for next tax year will be £12500, and her income will be £9300 + £2700 = £12000 so she will have no tax to pay. When your wife reaches state pension age, she will become a tax payer and the gain using this procedure will a lot less.She does not have much time left, but HL are very efficient and it is doable. She can complete the risk assessment by phone - might be quicker?