Emergency tax and pension

loftus

Hopefully a fairly basic question.

I'm retiring at the end of February and plan to take the tax free lump sum from my DC pension before the end of the tax year.

My plan is to then take circa £1k a month through the next tax year to maximise the tax free withdrawals from the pension.

I'm assuming that if this is taxed under an emergency tax code it will still be tax free as the monthly withdrawals will be less than my personal allowance/12.

Is that correct?

Dazed_and_C0nfused

It won't be "tax free", it is taxable income.

But if the first payment is £1,048 or less then no tax will be deducted as that is the amount which can be paid before tax is deducted on the emergency tax code (1257L).

And if 1257L is your ongoing tax code then providing the average pay at each month is no more than £1,047 (ending with £12,579 or less) then no tax will be payable.

This assumes you have a Personal Allowance of £12,570 and not £11,310.

loftus

Yes I was loose with my language, I should have said no tax will be paid.

Many thanks.

dunstonh

I'm retiring at the end of February and plan to take the tax free lump sum from my DC pension before the end of the tax year.

Do you need it up front?  It can be more tax efficient to have it paid as part of the income.  

loftus

dunstonh said:

I'm retiring at the end of February and plan to take the tax free lump sum from my DC pension before the end of the tax year.

Do you need it up front?  It can be more tax efficient to have it paid as part of the income.  

I'm assuming this is the case if it would keep me out of a higher tax bracket?

Sadly this would not affect me. However if this assumption is wrong I would like to be better informed.

zagfles

loftus said:

dunstonh said:

I'm retiring at the end of February and plan to take the tax free lump sum from my DC pension before the end of the tax year.

Do you need it up front?  It can be more tax efficient to have it paid as part of the income.  

I'm assuming this is the case if it would keep me out of a higher tax bracket?

Sadly this would not affect me. However if this assumption is wrong I would like to be better informed.

It depends what you intend doing with the tax free lump sum, for instance if you invest it outside the pension you might pay tax on any growth. But unless very big can usually be avoided using ISAs, and dividend, savings, CGT allowances. Also possible inheritance tax and benefits implications.

But if you're going to spend it straight away or over a few years it's unlikely to matter much.

loftus

zagfles said:

loftus said:

dunstonh said:

I'm retiring at the end of February and plan to take the tax free lump sum from my DC pension before the end of the tax year.

Do you need it up front?  It can be more tax efficient to have it paid as part of the income.  

I'm assuming this is the case if it would keep me out of a higher tax bracket?

Sadly this would not affect me. However if this assumption is wrong I would like to be better informed.

It depends what you intend doing with the tax free lump sum, for instance if you invest it outside the pension you might pay tax on any growth. But unless very big can usually be avoided using ISAs, and dividend, savings, CGT allowances. Also possible inheritance tax and benefits implications.

But if you're going to spend it straight away or over a few years it's unlikely to matter much.

I see. Thank you.

No it's not very big and will be spent over the next year to 18 months.

The DC pension pot is to get me through to when I can take my final salary pension without penalties and then to top that up until my state pension begins.

Dazed_and_C0nfused

By taking the full TFLS upfront you will make all of the remainder, including any investment growth, taxable income.

For example you have £200k in the pot.  You take £50k TFLS leaving £150k in the fund.  That £150k is all taxable when withdrawn.

But if it is still invested you might have say £180k in the pot a few years later.  All £180k is taxable when withdrawn.

zagfles

Dazed_and_C0nfused said:

By taking the full TFLS upfront you will make all of the remainder, including any investment growth, taxable income.

For example you have £200k in the pot.  You take £50k TFLS leaving £150k in the fund.  That £150k is all taxable when withdrawn.

But if it is still invested you might have say £180k in the pot a few years later.  All £180k is taxable when withdrawn.

Or if you leave it untouched/uncrystallised the pot would be £240k based on same growth and you'd still have £180k taxable. It makes no difference to the taxable amount when you take the tax free part.