Panic, Got a problem, please help Drawdown Pension and Child tax credits

happyhero

Hi I have also put this question in the pension section but it was suggested to me to put it here too. can anybody guide me here. I researched taking a drawdown Pension and recycling before doing it and thought I had it all figured out.

I was on zero income living off investments in ISA's with HL. I also have SIPP with HL which I put into drawdown leaving some money in SIPP to keep it open and hopefully do a bit of recycling to permitted levels.

I take no benefits from the state other than the child benefit and child tax credits. Kids are 11 and 17.

My wife is part time on about £10,500 per year and we receive Child Tax Credits for our 2 kids. But I just noticed it has dropped by about £300 this month, and I suppose future months which is a massive drop for us(£3,600/year if it stays at this).

Just today my wife and I have received updated Child Tax Credit statements showing an added income, for my wife funny enough of £9,650 which is weird as the actual gross withdrawal was made by me and was £9,950, any ideas what the £300 difference is? (Just noticed when you do a CTC calculation it always totals £300 less on the Gov.uk calculator, whys that? )

Not sure its relevant but as this amount was under my annual allowance and I paid emergency tax I have just (last few days)successfully reclaimed the tax in full that was taken.

Is this drop an over reaction that will be corrected when they realise I am only doing this once this year and not every month (a bit like how emergency tax reacts when started off)?

Is this right that if our household was on roughly £20,000 per year instead of the £10,500 we do get it would effect the tax credits so much?

If we do lose this amount of money this seems to defeat the object of the drawdown and accessing as much of my money now tax free as I can and recycling etc.

We are both 56 by the way.

I thought with zero income and an unused annual allowance, I would exploit this tax advantage until I draw a pension in a few years.

Any help advive greatly appreciated.

Stop_Watch

I take no benefits from the state other than the child benefit and child tax credits. Kids are 11 and 17

I am confused so you do take benefits from the state?

The drop in income is because one of the kids is 17 and they don't know id they are in education yet.

alewin

happyhero wrote: »

My wife is part time on about £10,500 per year and we receive Child Tax Credits for our 2 kids. But I just noticed it has dropped by about £300 this month, and I suppose future months which is a massive drop for us(£3,600/year if it stays at this).

Just today my wife and I have received updated Child Tax Credit statements showing an added income, for my wife funny enough of £9,650 which is weird as the actual gross withdrawal was made by me and was £9,950, any ideas what the £300 difference is? (Just noticed when you do a CTC calculation it always totals £300 less on the Gov.uk calculator, whys that? )

Not sure its relevant but as this amount was under my annual allowance and I paid emergency tax I have just (last few days)successfully reclaimed the tax in full that was taken.

You and your wife were both claiming Tax Credits with an income of £10,500. Taking taxable drawdown from your pension is classed as income and has now taken your household income to over £20,000 for this year and your Tax Credits award has been adjusted accordingly. It's quite simple.

The annual allowance is for tax purposes only, currently £11,500 before you have to pay tax. It does not mean that you can take/earn under that limit and not declare it, it is still income.

alewin

happyhero wrote: »

If we do lose this amount of money this seems to defeat the object of the drawdown and accessing as much of my money now tax free as I can and recycling etc.

Tax Credits is a means tested benefit, it's an extra payment for people with low incomes and as your income for this year has almost doubled you do not need the extra money from the state.

If you had just taken the 25% tax free from your SIPP you would have been fine as that is not classed as income.

happyhero

Stop_Watch wrote: »

I am confused so you do take benefits from the state?

The drop in income is because one of the kids is 17 and they don't know id they are in education yet.

I just meant I'm not taking anything like income support, ie trying to get something because I do not have a normal job or way of getting an income. I'm trying to support myself with my investing with ISA's and SIPP.

happyhero

alewin wrote: »

You and your wife were both claiming Tax Credits with an income of £10,500. Taking taxable drawdown from your pension is classed as income and has now taken your household income to over £20,000 for this year and your Tax Credits award has been adjusted accordingly. It's quite simple.

The annual allowance is for tax purposes only, currently £11,500 before you have to pay tax. It does not mean that you can take/earn under that limit and not declare it, it is still income.

I meant as a non tax payer with a normal personal allowance I am allowd to take up to my personal allowance tax free but this does involve the process of paying tax first and then reclaiming it.

I had no intention of not declaring anything although you could accuse me of that as I must admit the pension side was so complicated that once I had fully learnt how to draw my pension in this way and feeling satisfied with my new knowledge of things so complicated, I completely overlooked that it would be classed as income as far as CTC are concerned....I was only thinking about not taking too much income to go past my personal allowance... you learn as you go along I suppose.

To explain further, income has not been a prominent thing for me to mention for a while as I managed my income via ISA investments (with a struggle) and so I was classed as having no income. But because I am now 56 I can mess about a bit more with my SIPP hence my using this method to draw some of my pension(which was to try and suplement my income. But obviously I missed one part because of my lack of experience in this area previously.

I'm now tidying it up and will speak to CTC.

POPPYOSCAR

What tax year did you do the drawdown?

If it was before April 5th I think it would affect last years award and create an arrears situation as well as reducing the current year award.

happyhero

POPPYOSCAR wrote: »

What tax year did you do the drawdown?

If it was before April 5th I think it would affect last years award and create an arrears situation as well as reducing the current year award.

Hi POPPYOSCAR it was year 2016/2017, you are correct, I'm now wondering whether to pay the amount owing back CTC making everything normal again as far CTC payments are concerned, as I have the tax refund to do this or whether to just live a bit tight for a while and put the tax refund somewhere useful like my ISA or SIPP, what do you think... I'm worried now I might be missing something I could do?

POPPYOSCAR

happyhero wrote: »

Hi POPPYOSCAR it was year 2016/2017, you are correct, I'm now wondering whether to pay the amount owing back CTC making everything normal again as far CTC payments are concerned, as I have the tax refund to do this or whether to just live a bit tight for a while and put the tax refund somewhere useful like my ISA or SIPP, what do you think... I'm worried now I might be missing something I could do?

Sorry, I could not offer any advice on that.

Hopefully, someone else here can.

NotSkint

Happy hero, I have responded to your question on the pensions board; hopefully it can put you back to where you were

happyhero

Ok thanks everybody, I think I have sorted out this problem. After reading all your replies and a bit of Googling I then felt armed enough to attempt contacting HMRC and discuss it all and as mentioned above I can offset all the contributions I made which means I actually will end up better off in the long run although it can take up to 10 weeks they said as they process all the information..

I paid enough in, in 2016/17 to mine and my wife's account to not only rectify the problem of drawing drawdown but it also to knock some off off my wife's wages, thereby increasing our future payments once they are sorted out.

Only annoying thing after all that is I was told I must wait for my renewal pack before I can enter the SIPP contributions which means low payments for a little while, but I can happily suffer this considering where it was I thought I was this morning, owing £3000 to HMRC.

Now I know I can continue to recycle my SIPP and add some more as long as I keep tabs on the effect on the CTC. Using the online CTC calculator makes this straight forward. Thank you everybody for your help and inputs.