Tax on pension at 50

kisk

I’m due to receive a pension at 50 and was wondering how I will be affected by tax. I am working and will continue to work when I get the pension so am I right that the pension will be added to my wages with the total amount being what the tax man will look at. The total will then attract 40% for the amount above £34,600.

Is this correct? Is there is any other way to avoid higher tax bracket?

kisk

jem16

Almost correct. It's the total amount above £39,825 ( £34,600 + £5225 personal allowance) which will be subject to higher rate tax.

Can't see any way to avoid it other than not taking the pension until you stop work.

kisk

Thanks Jem

At least it’s better than I thought. Don’t think I can defer the pension as I took a voluntary severance package and it was to start at 50.

kisk

dunstonh

Does the pension offer any deferment terms?

If its a personal pension, you dont have to take it and you can let it carry on growing (as well as your annuity rate or drawdown rate being better later).

If its a money purchase occupational scheme then you could leave it or transfer it to personal pension and leave it until a later date.

if it is a final salary scheme then you could enquire what deferment terms exist, if any.

EdInvestor

Can you take a part of it as a tax free cash lump sum with a reduced pension? Worth looking at that.

kisk

The pension is a final salary scheme and I will contact them to see if there is a deferment option but I dont know how this would benifit me. Do the funds continue to grow?

I can also take a tax free lump sum up for every £1 pension cashed in I would get £9 as a lump sum. I think I would prefer to leave it all in the pension.

kisk

dunstonh

The pension is a final salary scheme and I will contact them to see if there is a deferment option but I dont know how this would benifit me. Do the funds continue to grow?

You dont have funds on a final salary scheme. Its based on years of service and your final pensionable salary (index linked).

It is possible that there is a reduction at 50 that wouldnt be present at 55 or 60.

ChrissyR_2

Hi kisk,

My pension has 6% reduction for each year before normal retirement age but at present a 3% inflation rate. So each year reduces my pension by 3% (without complicating the maths). If you defer then it should be plus 3% (see last!).

So deferring is good but remember to look at the keeping under the second state pension threshold if this is applicable once you retire (60-65).
Other than that it seems 'bad' to lose the 40% on it before deferring. Admitted that if your pension is large it all changes.

Chris

jonathon_hart

You need to check this with the pension administrator. If the scheme has a Normal Retirement Age of 50 (as oppose to allowing you to retire early at 50) then it may not allow for deferrment as these types of schemes are often special arrangements with the Inland Revenue (I used to administer a scheme that had this situation!). Your Normal Retirement Age should be in your contract of employment from when you were at the company.

Therefore if you do wish to consider deferrment then you need to check with the scheme administrators.

On the tax issue if you take a pension then it is treated as earned income so is subject to income tax by the same rules as if you were in paid employment.

kisk

Thanks for all your help. My pension was I final salary and I was paying in the max I could to buy extra years. I took a package from the company as a voluntary redundancy and this was before some rule came in that the company had to show any such payments in their profit loss account. As far as I know the company paid in the money required to make up my pension to allow it to start paying at age 50. It was superannuation scheme and run independently from the company.

Thanks again – I now know it will be treated as income.

kisk