Maximising Tax Relief

chrisrsmith

I have been unemployed this past FY and will may return to work next FY.
I have two pensions and good property equity - no mortgage/debt etc etc.
I took 25% tax free from one pension - I have two and don't intend to touch the second.
As my tax code is £12500 (or whatever the exact figure is at the moment ) - is it worth taking more from the pension to maximise my tax free allowance this year? 
Also, if I do this, is the interest on my pension left now taxable - I heard this but looking for clarification.

Overall 'I THINK' it's worth taking more from the pot due to maximise my tax free allowance this year but????

Dazed_and_C0nfused

I don't think you are looking to maximise tax relief, you are looking to minimize tax liability.

If that would be your only taxable income and you have not applied for Marriage Allowance then ultimately no tax would be payable on £12,500 of taxable pension income.

However, if you take taxable income from your pension like that you will immediately restrict your future contributions to a maximum of £4,000/year (inclusive of the basic rate relief added by the pension company).
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/money-purchase-annual-allowance-mpaa/

Also, if I do this, is the interest on my pension left now taxable - I heard this but looking for clarification.

Why do you hold your pension in cash rather than being invested?  Or by interest do you mean increase in pension value?  Either way if it is still within your pension it isn't taxable, only the pension income you draw is taxable.  

chrisrsmith

Dazed_and_C0nfused said:

I don't think you are looking to maximise tax relief, you are looking to minimize tax liability.

If that would be your only taxable income and you have not applied for Marriage Allowance then ultimately no tax would be payable on £12,500 of taxable pension income.

However, if you take taxable income from your pension like that you will immediately restrict your future contributions to a maximum of £4,000/year (inclusive of the basic rate relief added by the pension company).
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/money-purchase-annual-allowance-mpaa/

Also, if I do this, is the interest on my pension left now taxable - I heard this but looking for clarification.

Why do you hold your pension in cash rather than being invested?  Or by interest do you mean increase in pension value?  Either way if it is still within your pension it isn't taxable, only the pension income you draw is taxable.  

Thank you for your guidance - much appreciated. Very interesting point regarding future (potential) contributions - yikes!!
The only reason I was thinking of doing this was to indeed, yes minimise my tax liability. Take advantage of the fact that I haven't earned anything this year and considering future tax liability whenever I finally fully retire at a later date.

Dazed_and_C0nfused

On its own that could be a very sensible idea, once the year is finished your Personal Allowance is lost.

But bringing the MPAA into play could be a major problem, a lot depends on your age and future intentions

Albermarle

Many people take £16666 from their pension each year . 25% is tax free and the remaining taxable part is £12500 

chrisrsmith

Albermarle said:

Many people take £16666 from their pension each year . 25% is tax free and the remaining taxable part is £12500 

Hi,
Could you explain the figure please - £16666?
I'm 59 this year just FYI.....
I already took 25% tax free as mentioned in the first post...
Thanks

Albermarle

chrisrsmith said:

Albermarle said:

Many people take £16666 from their pension each year . 25% is tax free and the remaining taxable part is £12500 

Hi,
Could you explain the figure please - £16666?
I'm 59 this year just FYI.....
I already took 25% tax free as mentioned in the first post...
Thanks

OK the £16666 only works if you still have some tax free cash left to use in the pension . If you have already taken all the 25% tax free cash , then it does not work . It is one reason why it is often not advisable to take all the tax free cash out in one go , unless you really need it .
As your second pension is untouched so far , then you could use that to take out a mixture of tax free and taxable cash, up to £16666 and pay no tax assuming no other taxable income.

Dazed_and_C0nfused

Could you explain the figure please - £16666?

Where this method can be used it is split 

£4,166 = 25% TFLS

£12,500 = 75% taxable pension income

SomeMadeUpName

Albermarle said:

chrisrsmith said:

Albermarle said:

Many people take £16666 from their pension each year . 25% is tax free and the remaining taxable part is £12500 

Hi,
Could you explain the figure please - £16666?
I'm 59 this year just FYI.....
I already took 25% tax free as mentioned in the first post...
Thanks

OK the £16666 only works if you still have some tax free cash left to use in the pension . If you have already taken all the 25% tax free cash , then it does not work . It is one reason why it is often not advisable to take all the tax free cash out in one go , unless you really need it .
As your second pension is untouched so far , then you could use that to take out a mixture of tax free and taxable cash, up to £16666 and pay no tax assuming no other taxable income.

Just a note: That "assuming no other taxable income" bit does include any state pension sfaik*. So the £16,666 suggestion is really for folk bridging until state pension kicks in. Sorry if that goes without saying (and no doubt you are well below 67), but I think it comes a shock to a lot of people that state pension is taxable income.

*everyone please note the sfaik and correct me if I'm wrong. Thx

SomeMadeUpName

SomeMadeUpName said:

Albermarle said:

chrisrsmith said:

Albermarle said:

Many people take £16666 from their pension each year . 25% is tax free and the remaining taxable part is £12500 

Hi,
Could you explain the figure please - £16666?
I'm 59 this year just FYI.....
I already took 25% tax free as mentioned in the first post...
Thanks

OK the £16666 only works if you still have some tax free cash left to use in the pension . If you have already taken all the 25% tax free cash , then it does not work . It is one reason why it is often not advisable to take all the tax free cash out in one go , unless you really need it .
As your second pension is untouched so far , then you could use that to take out a mixture of tax free and taxable cash, up to £16666 and pay no tax assuming no other taxable income.

Just a note: That "assuming no other taxable income" bit does include any state pension sfaik*. So the £16,666 suggestion is really for folk bridging until state pension kicks in. Sorry if that goes without saying (and no doubt you are well below 67), but I think it comes a shock to a lot of people that state pension is taxable income.

*everyone please note the sfaik and correct me if I'm wrong. Thx

Sorry - just seen in the post that you say you are 59, so my interjection was unnecessary (if indeed it was even correct).

chrisrsmith

Dazed_and_C0nfused said:

I don't think you are looking to maximise tax relief, you are looking to minimize tax liability.

If that would be your only taxable income and you have not applied for Marriage Allowance then ultimately no tax would be payable on £12,500 of taxable pension income.

However, if you take taxable income from your pension like that you will immediately restrict your future contributions to a maximum of £4,000/year (inclusive of the basic rate relief added by the pension company).
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/money-purchase-annual-allowance-mpaa/

Also, if I do this, is the interest on my pension left now taxable - I heard this but looking for clarification.

Why do you hold your pension in cash rather than being invested?  Or by interest do you mean increase in pension value?  Either way if it is still within your pension it isn't taxable, only the pension income you draw is taxable.  

Thinking about this over night, and reading through the links you provided.....thinking about this aspect you mentioned:
"However, if you take taxable income from your pension like that you will immediately restrict your future contributions to a maximum of £4,000/year (inclusive of the basic rate relief added by the pension company).
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/money-purchase-annual-allowance-mpaa/"
Is the 25% tax free element that I have taken considered as taxable income? I.e. does the £4K future contribution restriction aspect apply?