Private pension rules

50Twuncle

My wife (aged 50) believes that she can cash in her (£80k) private pension in 5 years time - without paying any tax or losing a penny - is this true ?

lisyloo

No it’s not.
She can get 25% tax fee (known as the tax feee lump sum).
The rest is subject to income tax.

If she wasn’t working and didn’t have any other income then she could take the 0% income tax band every year (£12.5k in 2019/2020) and withdraw it out over a period of several years without paying tax.

But she can’t get the lot without paying tax.

Flexible drawdown rules were introduced in 2015 where you could take the whole lot and this might be what she is thinking of but it’s not tax free.

Spreadsheetman

No. If she has no other income she will get 25% tax free, her personal allowance (£12,500 next tax year) tax free and the rest taxed at whatever the tax bands are - probably just fits in the 20% band assuming that is the basic rate then. Roughly £9,500 tax.

50Twuncle

Spreadsheetman wrote: »

No. If she has no other income she will get 25% tax free, her personal allowance (£12,500 next tax year) tax free and the rest taxed at whatever the tax bands are - probably just fits in the 20% band assuming that is the basic rate then. Roughly £9,500 tax.

Right - so she can take 25% - £20k at todays value + £12.500 = £32,500 per year - without paying any tax ?
She doesn't have any more income

Flugelhorn

50Twuncle wrote: »

Right - so she can take 25% - £20k at todays value + £12.500 = £32,500 per year - without paying any tax ?
She doesn't have any more income

probably correct for year 1 but not per year after year 1 it would be £12,500 per year as the lump sum has already been paid

Dazed_and_confused

She could choose a different route and take the tax free element with each payment rather than upfront.

So in 2019:20 she could withdraw £15,000 and pay no tax.

£3,750 would be TFLS leaving £11,250 taxable pension income.

NB. As this is your wife and she apparently has no other income I'm assuming she has applied for Marriage Allowance and gets a reduced Personal Allowance of £11,250 in 2019:20.

If not the amounts would be £16,666, £4,166 TFLS, £12,500 taxable.

And don't forget if she puts this money into a interest paying (non ISA) account her interest will now all have to be taxed as she no longer has any spare Personal Allowance. But currently this will be at the savings starter rate of tax where (in your wife's situation) £5,000 of savings interest would be taxed at 0% .