Tax payable on pension

berbatov10

Good afternoon, I hope someone can confirm my thoughts. I am now 55, still working and pay higher rate on about £18000 of income a year. I have an occupational pension but also have an old small pension with Friends Life worth about £11,400 which I am thinking of cashing in to fund a big holiday to visit family down under. Would I be correct I thinking that I would pay 40% tax on £1400 of that sum?


Thanks in advance

molerat

You will pay tax on 75% of the pension fund withdrawn, £8550, so £3420 in tax will be due. Due to the way pension lump sums are taxed it is unlikely that it will be taxed correctly at source and there will be some correction due at the end of the tax year. There must be a better way of funding a holiday.

xylophone

http://adviser.royallondon.com/technical-central/pensions/benefit-options/emergency-tax-and-lump-sum-withdrawals/


AND NOTE IF APPLICABLE

https://www.moneymarketing.co.uk/govt-cuts-money-purchase-annual-allowance-half/

berbatov10

Both thanks for the advice. Molerat with that sort of taxation Wonga would be a cheaper option. All joking apart a genuine thank you, I will re visit the funding. I now wonder what to do with the pension pot as it has had no additional contributions and bar the latest increase due to stock market has always wavered around £10,000. The yearly pension would be a few hundred pounds a year at retirement

MyOnlyPost

If you are likely ot be a lower rate tax payer in retirement the tax on the lump sum would then be lower. If the lump sum takes you over the 40% threshold you can withdraw it over a number of years. You may need to switch it to another product for this

Deneb

berbatov10 wrote: »

Both thanks for the advice. Molerat with that sort of taxation Wonga would be a cheaper option. All joking apart a genuine thank you, I will re visit the funding. I now wonder what to do with the pension pot as it has had no additional contributions and bar the latest increase due to stock market has always wavered around £10,000. The yearly pension would be a few hundred pounds a year at retirement

I'd have been paying sufficient into that or another pension to avoid having to give the taxman 40% of the £18K a year that you say places you into HR liability!

berbatov10

Guys both the above are options, I shall definitely NOT be withdrawing it and will look for suitable credit card to put holiday on, moving the debt around . I am unlikely to be a lower rate tax payer for a couple more years, but much food for thought. Thanks

mgdavid

berbatov10 wrote: »

..... I now wonder what to do with the pension pot .......

if it were me I'd be banging in as much as humanly possible of that £18 grand income you're paying 40% tax on.
(I should explain I have an almost pathological hatred of the 40% tax rate)

MyOnlyPost

mgdavid wrote: »

if it were me I'd be banging in as much as humanly possible of that £18 grand income you're paying 40% tax on.
(I should explain I have an almost pathological hatred of the 40% tax rate)

I always wished I was paying the 40% rate as it would have meant I was on at least £10k more salary at any point in my working life

bowlhead99

berbatov10 wrote: »

Both thanks for the advice. Molerat with that sort of taxation Wonga would be a cheaper option. All joking apart a genuine thank you, I will re visit the funding.

A cheap loan (not wonga) is not actually a bad way to do it, if it means you can avoid paying 40% tax on the pension withdrawn and instead take that pension later when you have stopped working and are at basic rate, getting much more value out of the pension by only paying 20% on the taxable bit instead of 40%.

I'm not old enough to have any ability to draw pension yet but have faced similar decisions in wanting to fund more pension (to save more tax) than my free cash flow would allow, and used borrowing to achieve that...

For example, consider this plan to fund your holiday of a lifetime.

Let's say you would have wanted £8000 for the holiday. If you draw your £11.4k pension this year, paying tax on 75% of it, you have a 40% tax bill of £3400ish as someone calculated in the first reply, and you get your £8k spending money. Alternatively if you could take that pension in later life as a basic rate taxpayer (20% instead of 40%) you would have a £1.7k saving on the tax bill (1700 instead of 3400). So accessing the money now when you are a high rate taxpayer seems quite an expensive way of doing it.

Alternatively:

Tesco will loan £25k unsecured at a standard rate of 3.4% over seven years. That results in a not unmanageable £334 a month payment to them and a total payment of £28k over the next seven years. So, a £3k total interest cost. My "not unmanageable" comes from the fact that I'm guessing you earn about £60k a year if you're 18k into high rate band.

If you get the loan borrowing for £25k and spend £8k on a holiday, you have £17k cash left over. Now, contribute £14400 of that to a pension plan in March this year leaving £2600 in your bank, and the provider will gross it up to £18000 inside the pension (£3600 for basic rate tax relief on top of the £14400 contrib).

Tell HMRC at the end of the tax year (a couple of weeks later) that you have made that extra contribution and they will acknowledge that you effectively only got basic rate relief on the £18k contribution, and you deserve more as a high rate taxpayer. You've paid £14400 for an £18k contribution when as someone who was £18k into the high rate bracket, you should have only paid £10800. They will send you back a further £3600 of tax relief as cash in your bank account.

So at this point, by about May this year, you have £2600+3600 in your bank account which is £6200.

Then pay that £6200 into the pension in the 2017/18 tax year. The pension provider will gross it up for basic rate relief of £1550, making it £7750 of addition in the pension. HMRC, noting that you've paid £6200 for a £7750 gross contribution but are a high rate taxpayer so need more relief, will send you another £1550 cash in your bank.

As you know this £1550 is coming into your bank you could actually just make a further pension contribution for 2017/18 (or wait to 2018/19) with this £1550 and it will get grossed up to £1940ish, with £390 of tax relief from the provider when he claims basic rate relief for you. Hmm. Now you have yet another £390 coming from HMRC. Well, you could keep on reinvesting the HMRC money but we're bored of this circular story now so when the £390 comes in, just buy a case of champagne and get lashed. Invite us all round to help you pisitt up the wall.


In your nice new personal pension you will now have accumulated a gross total of £18000 + £7750 + 1940 = £27690.

When you get to retirement and drop down to basic rate tax, draw out this £27690 (over a couple of years if necessary to avoid high rate). 25% (£6922) is a tax free lump sum. So 75%(£20767) is taxable. The tax on that at 20% is £4153. After you subtract the tax 4153 from the 27690 pension value you will have £23536 of cash, free and clear.

Now, if you remember, the loan from Tesco cost £28000 to pay off in a leisurely fashion over seven years, including all the interest. And what you take out of the pension is a little over £23500, assuming zero growth. In reality there is highly likely to be some investment growth over the time period depending when you bother to take it back out, but let's be cautious and assume nil.

So, Tesco bought you a holiday which needed £8k cashflow. They charge you £28k including the loan principal and interest, payable at a leisurely pace. But you took out £23.5k after tax from the resulting pension, even with no growth. So the net cost was £28k-23.5k = £4.5k. That sounds pretty damn good compared to your initial thought from post #1.

In the "cash in my old pension" technique you outlined in your opening post, you were going to need to pay 40% instead of 20% on the taxable bit of your old pension - a cost of £3400 tax which included the unnecessary £1700 of tax by paying it at high rate this year instead of lower rate later. So basically your plan cost £8000 for the retail price of the holiday and £1700 of unnecessary tax. A total £9700. Almost ten grand to get the family to Australia.

However, if you forget the "cash in my old pension" idea and embrace the "borrow the money for a holiday and also borrow some more money to make use of the available high rate tax relief on a new pension" idea, the holiday costs you only £4500!

Your £4500 net cost by paying off a loan and interest charges but making loads of money on tax relief is much better than having it cost you £9700. Over five grand saved.
:eek:

Oh and if the above seems like a bit of a hassle to save over five grand on a trip of a lifetime, don't forget that somewhere along the way we got a bit bored and bought a crate of champagne which we pistup the wall. Spend the money wisely and the savings would be even greater.

This is after all a money saving expert site - I think five grand saved and a crate of champagne is not bad for a few minutes of planning.

If you want to save more, get Nationwide to price-beat your Tesco loan offer by 0.5% to reduce the interest cost. Or take the £25k borrowing on your mortgage at 2% instead of 3 and reduce it further. Or borrow over a shorter, less leisurely period, and save interest costs that way.

berbatov10

Bowlhead as I read that my mouth dropped wider open. I don't know if you are a mathematical genius but that is such a brilliant plan and is plain English. If I buy that crate I will save you a bottle my friend