Tax on taking pension lump sum.

talexuser

I'm advising an elderly relative and just want to make sure I have all my facts correct please.

Her state and private pension income is 11000 in round figures.

Her savings interest gross is 450, so within the 0% band.

If her allowance is 11850 she has 400 of tax free allowance left this tax year.

Most of her savings are within an ISA wrapper, but she has an old pension of feeble growth of several thousand which she has no use for and does not take an income from. I advised to withdraw a 25% tax free lump sum from this pension last tax year to fund the ISA, and she still has about 6k left in the pension which would give a really meagre income if she took it (which she doesn't want).

If she withdraws a lump sum of 400x5=2000 before April, then 20% tax of 400 will be paid by the pension company since she has already had her tax free lump.

She will then be able to reclaim this amount of tax since within her allowance for this tax year (I assume form R38)?

Then just repeat in future tax years?

Thanks.

ermine

Sounds like you need one of these


https://www.gov.uk/government/publications/income-tax-repayment-claim-when-small-pension-taken-as-a-lump-sum-p53

xylophone

Her only income in the current tax year is £11,000 in pensions and £450 in savings?

As far as I can see:-

The Personal Allowance is £11,850 in the current tax year.

She can "earn" (pension receipts) of that much tax free.

After that, she has the 0% band for savings interest (up to £5000) to use.

https://www.gov.uk/apply-tax-free-interest-on-savings

In this tax year, she could draw down £850 from the crystallised personal pension - this would be taxed on an emergency basis as there is no tax code for the company to use - as this is less than 1/12 of the PA no tax would be taken off?

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

In the tax year 2019/20 the PA will be £12,500.

Perhaps drawdown under 1/12 of that in in the new tax year and then in future years as appropriate until the money has gone?

C_Mababejive

I do hope the OP doesnt mind me expanding on this subject as i was just about to ask the same question but noted his/her posting at the top of the list!

I didnt want to start a second conversation and clutter up the board.

My question is about taking money out of a SIPP.

I dont fully understand the intricacies of SIPPs but im learning.

My situation with a SIPP would be to take an annual single lump sum.

I understand that 25% of this would be tax free each year?

So how would the other 75% be taxed and who would do it?

Would the SIPP pay me gross and i would deal with it via SA?

Would they deduct 20% and leave me to square it up via SA?

Or would they,as an acquaintance told me, tax me at 40% and leave me to reclaim any overpaid tax via SA or via a refund claim on the HMRC website?

Thanks all

Dazed_and_confused

The pension company would initially tax you using the emergency tax code so the first £988 would have no tax deducted and then 20, 40 and 45% tax would be deducted depending on how much the taxable amount was.

HMRC would then issue a tax code based on your particular circumstances and the pension company would then deduct tax based on this from future payments.

Pensions are taxed under PAYE, you cannot choose to not bother with this and be paid gross with no tax (although keeping your initial taxable payment to £988 or less will mean no would be deducted due to the emergency tax code being used).

So you can end up owing extra tax if you have used your Personal Allowance elsewhere.

C_Mababejive

Thanks D&C,,,sorry,,where did the £988 figure come from??

Dazed_and_confused

The emergency tax code is currently 1185L. Operated on a non-cumulative basis.

Most pension companies referred to on these threads seem to pay monthly so tax code 1185L will mean 1/12 of the allowances from the emergency tax code will be available.

Tax code 1185L = 11,859 allowances

1/12 of 11859 = £988

You also get 1/12th of the basic rate band so the next £2875 would be taxed at 20%

And 1/12th of the higher rate band so the next £8637 would be taxed at 40%

So if your first payment exceeded £12,500* some 45% tax would be deducted

*1/12th of £150k

talexuser

xylophone wrote: »

In this tax year, she could draw down £850 from the crystallised personal pension - this would be taxed on an emergency basis as there is no tax code for the company to use - as this is less than 1/12 of the PA no tax would be taken off?

Thank you, I see the savings income does not need to come out of the personal allowance, since within the 0% band of its own. I was also wrong about the tax calculation, it's just a simple job of withdrawing what's left of the allowance, and the fact it is below the 1/12 rule means no hassle of having to claim tax back. Good job I asked the question. The only downside it will take longer to drawdown the pot, but at least not worth paying an extra 20% if she is in no immediate need of the money. Thanks again.

squirrelpie

Perhaps drawdown under 1/12 of that in in the new tax year and then in future years as appropriate until the money has gone?

I think once the first payment has been taken, HMRC will issue a tax code to the pension provider and subsequent payments will be taxed on that basis rather than an emergency basis. So the limit to the amount for the second and subsequent payments should be determined from the tax code rather than 1/12 of personal allowance.

xylophone

HMRC will issue a tax code

Possibly but if the £850 is taken very late in this tax year and the next payment early in the next possibly not.

I imagine that at the moment the tax code on the private pension she is currently receiving reflects the fact that she is also drawing a state pension - she might in future wish to request the code to be split to take account of two private pensions (the current private pension and the "feeble growth" pension).

She would also need to take into account increases in SP (and on the private pension she is currently receiving on a regular basis) when assessing how much she could take as a lump sum tax free from the "feeble growth" pension and adjust as appropriate.

xylophone

Another thought- is your relative eligible to " de-retire" in respect of her state pension?

She might consider deferring it for the next tax year and using the "feeble" pension as an income replacement until it is gone?

http://www.rights4seniors.net/content/deferring-state-pension

Indeed, if you start to draw your pension, you can change your mind and defer it, but they can only do this once.