Take pension and carry on working - income tax query

techwatcher

Hi,
My wife reaches 55 in April and was planning to cease work and take her two pensions, a defined benefit scheme and a separate defined contribution pension. She has now heard that she will be made redundant sometime after May this year and she stands to receive a decent redundancy package if she stays.

We understand that if she chooses to stay she can take her pensions and carry on working but how does income tax work in these situations? She works part-time and earns around £10000 a year so doesn't currently pay income tax. Her two pensions will pay around £9000 a year so she will be liable for tax above her personal allowance.

On 't Internet it says that the pension providers will deduct tax based on her tax code but how do they 'know' about her other income and how will they calculate her income tax in this situation?

Any help much appreciated!

Albermarle

Normally both pension providers will put her on an emergency tax code , which basically means she will pay 20% on all pension payments . Then she will need to contact HMRC and explain she has three incomes which in total are above the personal allowance but individually are all below the personal allowance . They will then sort out the best way to arrange it , hopefully.
In any case her employer and both pension companies will report her income to HMRC so they will know but could take some months to get to the end solution.

Dox

Is one of the pensions she is planning to draw in respect of her current employment? If so, there may be various things to consider, especially if a redundancy payment is in the offing.

techwatcher

Dox wrote: »

Is one of the pensions she is planning to draw in respect of her current employment? If so, there may be various things to consider, especially if a redundancy payment is in the offing.

Hi, thanks for responding. Yes, the defined benefit pension is in respect of her current employment. Could I ask what other things we may need to consider?

Silvertabby

techwatcher wrote: »

Hi, thanks for responding. Yes, the defined benefit pension is in respect of her current employment. Could I ask what other things we may need to consider?

Different schemes may have different rules - but if she is currently working in the public sector then she won't be able to draw her benefits and just carry on working in her current post. In the case of the LGPS, for example, she would only be able to access her benefits on full retirement, or if she is granted flexible retirement. However, as she is already working part time, then flexi probably wouldn't be an option. Again, in the case of the LGPS, pension benefits may be paid without any actuarial reductions for early payment in the event of redundancy.


Make sure your wife knows exactly which rules apply before doing something she may later regret.

jamesperrett

What is the normal retirement age for the defined benefit pension? If it is higher than 55 then it makes little sense to take it at 55 as it will be reduced quite substantially (by something like 20-25% if NRA is 60). There is a possibility that redundancy could allow the pension to be paid immediately with no reduction.

If she takes the pension but continues to work she probably wouldn't be entitled to this enhancement. There are often also limits on how much pension can be paid - the combined pension and salary cannot be more than she would have earned before retirement - although she needs to look at the pension scheme details to see exactly how this applies in her case.

Flugelhorn

in the nhs, redundancy is not payable for time where pension has already commenced.

techwatcher

jamesperrett wrote: »

What is the normal retirement age for the defined benefit pension? If it is higher than 55 then it makes little sense to take it at 55 as it will be reduced quite substantially (by something like 20-25% if NRA is 60). There is a possibility that redundancy could allow the pension to be paid immediately with no reduction.

If she takes the pension but continues to work she probably wouldn't be entitled to this enhancement. There are often also limits on how much pension can be paid - the combined pension and salary cannot be more than she would have earned before retirement - although she needs to look at the pension scheme details to see exactly how this applies in her case.

Thanks James. Normal retirement age for the defined benefit scheme is 65. We aren't too concerned about the reduction by taking it early and the associated lump sum would be useful.

Thanks for the information on limits on how much pension can be paid - we will check the pension details.

techwatcher

Silvertabby wrote: »

Different schemes may have different rules - but if she is currently working in the public sector then she won't be able to draw her benefits and just carry on working in her current post.

Thanks - my wife works in the private sector so this aspect shouldn't be a problem.

atush

techwatcher wrote: »

Thanks James. Normal retirement age for the defined benefit scheme is 65. We aren't too concerned about the reduction by taking it early and the associated lump sum would be useful.

Thanks for the information on limits on how much pension can be paid - we will check the pension details.

Why arent you concerned as she will lose up to 50% of her pension for taking it 10 years early? Esp if she will be getting a redudancy payment? Wil the payment be in excess of 30K?

Dazed_and_confused

Normally both pension providers will put her on an emergency tax code , which basically means she will pay 20% on all pension payments

Emergency tax code is quite normal to start with.

But emergency tax code does not result in 20% tax being deducted.

Currently if the emergency tax code was used them the first £988/month would be paid with no tax being deducted.

This will increase to £1042/month on 6 April 2019.