£50000 pension pot

racey

I'm 74 with a reasonable, living income. 
I have about £50k in a pension. I don't need the money at the moment.
What are the tax implications of taking the money as one lump sum? Is its better to split the withdrawals over tax periods?
Any advice much appreciated

Marcon

racey said:

I'm 74 with a reasonable, living income. 
I have about £50k in a pension. I don't need the money at the moment.
What are the tax implications of taking the money as one lump sum? Is its better to split the withdrawals over tax periods?
Any advice much appreciated

If you take the whole pot (and from your description this is a defined contribution scheme with a 'pot') and have never before taken any tax free cash from it, then at the time you take the whole pot 25% will be tax free and the remaining 75% will be added to your other income in the tax year. If this pushes you into a higher rate tax bracket, then splitting the money over more than one tax year makes a lot of sense.

If you don't need the money at the moment, why do anything?

Albermarle

Although you have not supplied a lot of detail about your overall finances , from what you have said it only makes sense to withdraw the money ( and pay tax on it ) if you have some plan for it . 
Otherwise just leave it where it is .

If you do decide to take it , if it is an old pension , you may have limited options . It might be you can not take it out over two tax years and only in one go . You would need to speak to them to check .

dunstonh

What are the tax implications of taking the money as one lump sum? Is its better to split the withdrawals over tax periods?

If you dont need the pension, why would you take money from it.   It is currently sitting tax free and outside of the estate.  Paying tax to bring it into the estate doesn't sound like a good idea. (75% of the value will be added to your income and taxed at the appropriate tax band if you take it)

If you have an old fashioned pension, you may have to transfer it to a modern plan as many old ones are stuck on legacy rules (have to take pension by 75).  However, a simple transfer to a modern one avoids that.

zagfles

If you're below the IHT threshold it might be worth taking the 25% tax free lump sum even if you don't need it, since after age 75 the pension would likely be taxable your beneficiary if inherited.

jamesd

There are two main ways to take money from a modern personal pension and I'll assume that yours offers them, though it might be old enough that you'd need a transfer to get both options.

1. UFPLS. This is taking a lump sum from all or part of the pot, of which 25% is paid tax free and the remaining 75% is added to your taxable income.

2. PCLS (commonly called tax free lump sum) of 25% of any portion and the remaining 75% of that portion placed into a flexi-access drawdown account from which you can withdraw it when you like, the amount being withdrawn added to your taxable income when you take it.

The first is simple but doesn't allow much control and it can sometimes be administratively hard to make regular payments.

The second is good for decoupling the tax free from the taxable part so you can take a large tax free lump sum without also having to take the taxable income and be subject to higher rate tax that you could avoid by spreading the withdrawing out. It's very likely to be easy to set up regular monthly payments from the flexi-access drawdown account.

Because the taxable money is added to your normal income you'll pay a higher rate of income tax if you take it all at once, so best to do any withdrawing of the taxable part over several tax years.

When you first take taxable money the pension firm won't have a tax code for you and will have to use the emergency code. this will result in excess tax being deducted. that's reclaimable but it can be nice to avoid it by asking for a small payment then waiting for a few months for a proper tax code before doing big withdrawing. If you're using even regular income from a flexi-access drawdown account the normal PAYE that's used for pension income payments will take care of the refund automatically so it's not worth bothering about if you'll be setting up regular income, just start with the regular income you want at the beginning.

When you die, money in a pension is normally not part of your estate and is normally given to whoever you specify in an expression of wishes, though technically and in rare circumstances the pension fund trustees can override this, most likely in cases of new children and such. This money is tax free if you die before your 75th birthday, else it's added to the taxable income of the recipient when they withdraw it. They don't have to take it all at once, instead it goes into a beneficiary pension from which they can withdraw whatever part they like, whenever they like, at any age, including as a baby via their trustee and for their own personal needs only. Some older pensions don't support beneficiary pensions and may insist on a lump sum payment with its adverse tax consequences for the recipient who may get a higher tax bill as a result.

You're allowed to make pension contributions of up to 2880 net, 3600 with tax relief, until the day before your 75th birthday. You get the tax relief added even if you pay no tax. Those who are still working and earning can pay in a gross amount, including the tax relief, up to their earnings.

Once you reach 75 a check of whether you're over the lifetime allowance and have any annual allowance charge to pay will be made. Older pensions will be included in the calculation, perhaps a work final or average salary pension that you took ages ago. The same check is needed when you first take benefits from (withdraw from) part or all of the pension pot, so it's a bit of administrative headache that can't be avoided except by dying first.

Albermarle

zagfles said:

If you're below the IHT threshold it might be worth taking the 25% tax free lump sum even if you don't need it, since after age 75 the pension would likely be taxable your beneficiary if inherited.

I knew that for  a person dying after age 75 an inherited pension was taxable, and before  age 75 it was not .
However if you have not taken the TFLS and die after 75 , does that mean your beneficiary can not take the TFLS ? So you lose it in effect?

xylophone

I knew that for  a person dying after age 75 an inherited pension was taxable, and before  age 75 it was not .
However if you have not taken the TFLS and die after 75 , does that mean your beneficiary can not take the TFLS ? So you lose it in effect?

Below seems relevant.

https://adviser.royallondon.com/technical-central/pensions/benefit-options/reaching-age-75-our-top-five-faqs/

1. On death after age 75 how are death benefits taxed if paid to an individual?
   
   Regardless of whether the benefits are uncrystallised or in drawdown after age 75, the beneficiary will be subject to income tax on any benefits taken.  Death after age 75 is not a benefit crystallisation event so there is no lifetime allowance tax charge payable on death after age 75. 
   
   Death benefits from April 2015
   
   
2. Can you take a pension commencement lump sum after age 75?
   
   Yes.  If the product allows the individual to remain invested after age 75 then it is possible to take a pension commencement lump sum after age 75.  The individual should consider the taxation of death benefits as on death after age 75, the beneficiary will be subject to income tax on any benefits taken.  The right to pension commencement lump sum therefore ends when the individual dies.  This entitlement does not pass to a beneficiary.

racey

dunstonh said:

What are the tax implications of taking the money as one lump sum? Is its better to split the withdrawals over tax periods?

If you dont need the pension, why would you take money from it.   It is currently sitting tax free and outside of the estate.  Paying tax to bring it into the estate doesn't sound like a good idea. (75% of the value will be added to your income and taxed at the appropriate tax band if you take it)

If you have an old fashioned pension, you may have to transfer it to a modern plan as many old ones are stuck on legacy rules (have to take pension by 75).  However, a simple transfer to a modern one avoids that.

It is, as you suggest, an old fashioned "defined contribution" pension scheme and stuck on legacy rules. I need to transfer the pot to a modern scheme.
Where do I look for the most suitable schemes?
Many thanks for your help.

Albermarle

Many of the traditional pension providers , like Aviva, Royal London etc , will only accept new clients via a financial advisor nowadays . 
Standard Life is one that still accepts new clients without an advisor.
Otherwise so called 'Retail SIPPs' are the way to go for most people looking to set up a new pension, if they have some idea about investments . For £50K , you could look at Hargreaves Landsdown, Fidelity or AJ Bell .
If you prefer something simpler you could have a look at a robo advisor platform like Nutmeg .

zagfles

Albermarle said:

zagfles said:

If you're below the IHT threshold it might be worth taking the 25% tax free lump sum even if you don't need it, since after age 75 the pension would likely be taxable your beneficiary if inherited.

I knew that for  a person dying after age 75 an inherited pension was taxable, and before  age 75 it was not .
However if you have not taken the TFLS and die after 75 , does that mean your beneficiary can not take the TFLS ? So you lose it in effect?

Yes. I had this discussion with an elderly relative a few weeks ago, she is over 75 and nowhere near the IHT threshold but has a small untouched pension, advice she was given was "if you don't need it don't touch it". Bad advice IMO. But typical...