Taking full pension pot at 55

stevericks

I am approaching 55, I am in full time employment and have 3 pension pots. I would like to take one of my pots, worth roughly £100,000, on my 55th birthday in March next year. I want to take the whole pot as cash and I realise I will pay a lot in tax. What I am worried about though is then paying 40% tax on my income for the next year if it takes a couple of weeks to come through and I get it in April. Am I better off waiting a year and doing it January 23? I am wanting to take the money and become hopefully mortgage free ish.
I do still have a pension through work that I am still paying into. The one I want to take was frozen about 15 years ago.
Thanks,
Steve.

pensionpawn

For a DC pot 25% will be tax free so £75k will add to your tax liability for the relevant financial year. You could split your access taking £50k in March and £50k in April (new tax year) so only £37k5 will be added to each years tax liability. If you only want the money to clear a mortgage I would strongly advise refinancing your mortgage, if that's an option, as interest rates are at the lowest they'll ever be and not only will you avoid a hefty tax bill, you will probably be better off as repaying a mortgage is not financially prudent in the current climate, unless you have unusual circumstances.
The other option is to crystallise all three pensions and take the total 25% TFLS. This may be enough for your immediate cash needs without incurring a huge tax bill.

marlot

>> I do still have a pension through work that I am still paying into
That could be a problem, as you'll have triggered the MPAA.

dunstonh

 I am wanting to take the money and become hopefully mortgage free ish.

Using your pension to do that is rarely considered a good move.    Pension returns on the mainstream middle of the road investments return around 5-6%p.a.    Most mortgages are around 2% p.a.   So, ignoring tax, you are on to a loser straight away.    Then factor the tax into the pension withdrawal and it appears to be complete folly.  You would also be reducing your annual allowance to just £4000 a year.  That could mean you having to opt-out of your workplace pension.         

Why do you think that it is a good idea?

The one I want to take was frozen about 15 years ago.

I doubt it was frozen as you wouldnt be able to take it as a lump sum if it was.

marlot

Assuming that all thee pensions are defined contribution (ie. pots of money rather than defined benefit), you might be better crystallising all three, taking ONLY the 25% tax free from each.  

marlot

>> I am wanting to take the money and become hopefully mortgage free ish.
Whilst I understand the psychological benefit, the huge tax charge from your initial plan makes it a very expensive thing to do.  Much better to remortgage if you can. 

mark55man

I agree with pensionpawn, much better to take it in two chunks if you have to take it at all.

Lets say your salary is £50K so just on the borderline of Basic and Higher rate taxes

If you take £100K Out of your pension £75K would be taxable, so you would pay 40% on the amount up to £100K - ie pay 40% of £50K - ie £20K.  Then on the 25% left you would also pay 40% (ie another £10K), but for income above £100K pa you would also suffer a reduction of your personal allowance by £1 for every £2 earned, so that would reduce you personal allowance by £25K divided by 2 = £12.5K (as it happens that's almost all you PA).  This has the effect of bringing an extra £12,500 into 40% tax or an extra £5K 

So far you have £20K+£10K+£5K = 35K tax on £100K withdrawal

If you took it in in two batches either side of the tax year then
* Year one - Normal salary £50K  then withdraw £50K of which £12.5K is tax free and you would pay 40% on £37.5K = £15K
* Yearr two - same as above or total of £30K on £100K withdrawal

If you are not a higher rate tax payer the you can improve those numbers as you will pay 20% on the difference between where you start paying HRT and you taxable income.  Lets say you earned £40K, ie had £10K BRT left then that would be an extra £2K you would save.

That said, I think the plan is misguided - although if you personal circumstances force you into this position then the above is what it would cost you


PS - If you have other DC pensions, and can take them all, then the cost would be you have used to tax free now, and not later when (hopefully) you pots would have grown.  So that means your retirement would miss out on that extra tax free.  That possibly would be the easiest to bear.

PPS - many people are going the other way and have stopped overpaying or even prolonged their mortgage as interest rates are below the return they expect to make at a level of risk they are comfortable with.

Marcon

marlot said:

>> I do still have a pension through work that I am still paying into
That could be a problem, as you'll have triggered the MPAA.

In case those initials mean nothing to OP, they stand for Money Purchase Annual Allowance. The moment you 'flexibly access' a defined contribution pension (i.e. take a penny more than the tax free 25%, UNLESS you use the whole balance to buy an annuity), you are restricted to a maximum of £4,000 a year in contributions to any future DC pension. The £4K includes tax relief on personal contributions and any employer contributions.

cfw1994

A strange first post.   
Almost 100% certainly the wrong thing to do, as dunstonh has suggested & everyone has alluded....
Do pop back to tell us what you think now people have given you food for thought.

jamesd

You've come up with a plan that's roughly equivalent to amputating a leg to treat an ingrowing toe nail. Don't do it, there are far better ways of achieving your objective.

First problem is the huge tax bill, that effectively adds many tens of thousands to the mortgage bill. Then there's the MPAA that cripples your future pension investing ability. And for an entirely discretionary reason like paying off what's probably a very cheap mortgage.

However, you can get rid of the mortgage using pensions efficiently if you just change how you go about it.

There are no long term bad consequences to pension investing if you take just the 25% tax free part and put the 75% into a flexi-access drawdown account that you don't touch until you retire.

Three times in your life you can use the small pot rule to take out everything in a pot worth up to 10k without triggering the MPAA 4k restriction. You can move money around to do it. This is 25% tax free, 75% taxable. Do it once per tax year and that's 7.5k added to your taxable income each year so it probably won't be too bad.

Next you can use savings, the reduced mortgage cost and the small pot money to maximise your pension contributions. That can eliminate higher rate income tax and get you more 25% money to use on the mortgage while the rest helps you to early retirement.

That's a reasonably integrated plan that really will let you clear the mortgage at lower net cost, unlike the massive cost increase of the initial approach.

stevericks

I’m getting the impression that you all think it’s a bad idea. I think the first thing I need to do is go and see a financial adviser. Thanks for all your answers, think I defined to rethink.