Excess Redundancy into Pension

AlanP_2

Julia1927 wrote: »

Hi Kidmugsy,

Sorry to be a numpty. I thought I understood your reply but can you please clarify for me:

"Along with that you'd get £3500/3 as tax free lump sum = £1,666".
I'm sorry but I don't understand this?

Many thanks.

What it means us that £3500 would be the taxable income drawn out to get you up to full £12k pa. In addition you would get 1/3rd extra tax free as your tax free lump sum.

So draw out 5166, 25% would be 1666. Can be a better option than taking full 25% out in one go.

All round numbers and PA may not be exactly 12k in the years you do it.

If you need a bit extra each year take from 30k redundancy pot, but thus way you get cash out of your DC pot without paying tax on it.

Julia1927

Hi Alan P,

Thank you for trying to help me.

So, using my annual salary of £8,500, draw £5,166 from my DC pension each year giving me an income of £13,666 and take the balance to reach £17,000 from my redundancy money? Please can I ask you to explain how this additional tax free amount works? Also I still don't understand how taking £5166 works out to be £1,666 if its 25%?

Told you I was a numpty!
Thank you again.

kidmugsy

Julia1927 wrote: »

Also I still don't understand how taking £5166 works out to be £1,666 if its 25%?

Because I'm a rotten typist. I should have said "Along with that you'd get £3500/3 as tax-free lump sum = £1,166." The arithmetic that followed accordingly needs to be corrected. Sorry about that. Who's the numpty now?

Julia1927

Haha Kidmugsy

You are definately not a numpty!

The guidance you folks give on these boards is invaluable to many.

I'm still not sure how much I need to withdraw from the DC pension each year (sorry) as you describe.

I'm fine until we get to the £3,500 then you will get a tax free sum of £1,166? Does this mean I would draw out £4,666 each year?

Many thanks again. :T

atush

no 3600 taxed (but tax free as under your PA) plus 1666 tax free lump sum = 5166

kidmugsy

Corrected Version:-

kidmugsy wrote: »

After 18/19 suppose you are left on the £8,500 p.a. earnings. Probably the best way to fund your cost of living is (i) to take enough taxable income from your DC pension to use up your Personal Allowance against income tax. That might be roughly (predicting the future a bit) £12,000 - £8,500 p.a. = £3500. Along with that you'd get £3500/3 as tax-free lump sum = £1,166.

(ii) Then you'd use your capital. If you expect £17k per annum after tax to live on then you'd be taking from capital £17k - £12k - £1,166 = £3,834 per annum. So your capital should last a good long time and you still have back-up funds in your DC pension.

kidmugsy

Another idea occurs to me for 19/20 onwards, assuming that you are still earning £8,500 p.a. You could always choose to contribute some of your non-tax-sheltered capital into the pension. You'd be entitled to do so up to £8,500 p.a. gross = £6,800 net. The taxpayer obligingly adds back the tax rebate of £1,700 to bring the money back up to £8,500 even though you will not actually have paid any tax on that £8,500. And now that it's in the pension you can take out 25% tax-free and the other 75% perhaps tax-free depending on your earnings and your Personal Allowance.

You could actually start that game - of making extra pension contributions - in 18/19 if you wanted to. Maybe if you do the sums you'll find that this trick would let you retire a little earlier than age 66. Or instead you could use the bigger pension pot to let you defer drawing your State Retirement Pension by a year, say, because you'll have enough money in the DC pension to live off for that year. If you do defer the SRP by a year then thereafter it will be boosted by 5.2% for the rest of your days. That's reasonable value for extra index-linked income. Normally Im not a great fan of deferring SRP but if it allows you to draw more money out of your DC pension without paying tax on it then my objections vanish.

One last thought: you have checked, have you, your predicted SRP? Because your period of contributing to a DB pension probably means you were "contracted out" at the time. This can lead to a less-than-maximum new-style SRP.

Julia1927

Once again, a massive thank you for your guidance!

Kidmugsy, I am definately planning on paying as much of the £8.5k salary into a pension as soon as I start my new job.

For example does the following look ok?
Pay £26,800 directly from my redundancy into my dc pension.

This will be grossed up to £33,500 + £8,500 already in the pot = £42,000 now in DC pension.
Contribute e.g. £6,800 salary to pension.

In year 1 drawdown £12kish tax free leaving £30,000 + £8,500 (salary) in DC pot - Total £38,500
Take £5,000 from redundancy money to make up annual salary.

Year 2 - contribute £6,800 salary to pension.
In year 2 drawdown £12k leaving £38,500 + £8,500 salary - £12,000 income in DC pot - Total £35,000
Take £5,000 from redundancy to make up annual salary..... and so on??

Repeat each year until 66?
Or have I got this all wrong.......

Thank you.

:embarasse:embarasse:embarasse

Dazed_and_confused

If the £12k in year 1 is "tax free" in the sense it is the TFLS then taking another £12k in year 2 when you have a salary of £8.5k is going to mean you pay tax on £8.5k in year 2.

Remember if you are a basic rate payer contributions to a SIPP or personal pension do not make any difference to your personal tax position, you simply get the basic rate tax relief added to the pension fund but still pay the same tax as you would otherwise do i.e. on £20.5k if I've understood what you're suggesting correctly.

Not sure your maths adds up either or maybe it's just set out in a complicated way?

Julia1927

Ahhhh D&C. I see.... (I think?)

I thought I'd got it with Kidmugsy's reply a few messages ago in how best to draw out my income but now, putting my earned income £8.5k into a pension and how best to draw back out using my DC pot and redundancy monies to meet my yearly income requirement has totally flummoxed me!

Can you offer me any simplistic pointers please? An idiots guide would be very much appreciated!!!

Thank you.

:doh: