Cash In Pension - Tax loopholes are there any?

brunettegirl

My Husband is currently 56 and has 3 separate pensions  one is currently £111,000  £112,000 and £8,000 (New work based Pension) He wants to cash in the 2 larger pensions to buy a house. This would mean that the money from his pensions and my savings that we wouldn't need a mortgage, or a very small one. I am worried that  withdrawing the money would cost a HUGE amount in tax. So I have questions Im hoping someone might know please

Could 25% be taken from both pots as they are separate Tax free or just 1 of them?
Equally would the 75% taxable be on both individually or would they add them together?
Is there another way of doing this that won't cost a crazy amount of tax?

Thank you

Anonymous101

I'm not an expert or a professional and will yield to others superior knowledge here but my understanding this that -

- 25% TFLS could be calculated on the whole if your husband crystallises the whole amount.
- The sum of remainder is all taxable however the amount of tax you pay is calculated tax year by tax year depending on the amounts you're drawing per tax year and also has to consider other income (from employment for example).

There are some particular rules around small pots <£10k which his third pension would fall under but I'm not fully au fait with the ins and outs of these.

dunstonh

He wants to cash in the 2 larger pensions to buy a house.

That is going to be one hell of a tax bill.  Probably losing almost half of it in tax (as it will take him into the additional rate taxband and see the removal of his personal allowance).

This would mean that the money from his pensions and my savings that we wouldn't need a mortgage, or a very small one.

It would also mean he would be limited to just £4000 a year pension contributions going forward (including employer).   It will push his income to the breadline in retirement.   So, unless you have a lot of retirement provision, you are looking at around 25-30 years of a low income lifestyle.

Could 25% be taken from both pots as they are separate Tax free or just 1 of them?

25% from each.

Equally would the 75% taxable be on both individually or would they add them together?

Both the 75% chunks will be added to his income in this tax year and the tax he owes will be based on that figure.

Is there another way of doing this that won't cost a crazy amount of tax?

Take out a mortgage.  It will probably be a lot cheaper.   Alternatively, spread the withdrawal from the pension over multiple tax years.

What he proposes would normally be considered a very bad thing to do unless the justification stacks up.  It would only be expected to be justified in a very small number of cases.

Marcon

brunettegirl said:

My Husband is currently 56 and has 3 separate pensions  one is currently £111,000  £112,000 and £8,000 (New work based Pension) He wants to cash in the 2 larger pensions to buy a house. This would mean that the money from his pensions and my savings that we wouldn't need a mortgage, or a very small one. I am worried that  withdrawing the money would cost a HUGE amount in tax. 

Indeed it will. As suggested above, a mortgage may be a much cheaper route. I appreciate that not having a mortgage feels (and is!) attractive, but the tax bill you are setting yourself up for makes it an expensive option.

brunettegirl said:

Is there another way of doing this that won't cost a crazy amount of tax?

Not doing it would avoid the crazy amount of tax and also keep your husband's options open in terms of future pension contributions (i.e. he won't be limited to £4,000 a year - including any tax relief/employer contributions - for the rest of his days).

Might be worth taking some proper financial advice to see if putting one or more pensions into drawdown, so you can access the cash in chunks spread over different tax years, might be structured in a way which meets the mortgage payments.

nigelbb

If he wanted to play the long game he could take up residence in France then liquidate the pots totally & pay tax of just 7.5%. If he later returned to live in the UK there would be no more tax to pay.

Albermarle

Could 25% be taken from both pots as they are separate Tax free or just 1 of them?
Equally would the 75% taxable be on both individually or would they add them together?
Is there another way of doing this that won't cost a crazy amount of tax?

Just to clarify, it does not really matter if you have one or ten pensions. Your tax position does not change.

For example if you have one pension of £100K , you can take £25K tax free and £75K will be taxable .

If you have 5 pensions of £20K each, you can take £5K tax free from each one and £15K will be taxable.

So the end result is the same in money terms, just more admin with the second option.

Apart from the warnings above about incurring a huge tax bill if you take a lot of the taxable money at once, what are your plans for funding your retirement if the pensions are already spent on an house ?

brunettegirl

Albermarle said:

Could 25% be taken from both pots as they are separate Tax free or just 1 of them?
Equally would the 75% taxable be on both individually or would they add them together?
Is there another way of doing this that won't cost a crazy amount of tax?

Just to clarify, it does not really matter if you have one or ten pensions. Your tax position does not change.

For example if you have one pension of £100K , you can take £25K tax free and £75K will be taxable .

If you have 5 pensions of £20K each, you can take £5K tax free from each one and £15K will be taxable.

So the end result is the same in money terms, just more admin with the second option.

Apart from the warnings above about incurring a huge tax bill if you take a lot of the taxable money at once, what are your plans for funding your retirement if the pensions are already spent on an house ?

I will still have my pension (There is an 11 year age gap), the money not spent on  a mortgage will be saved and I will still be working for a good while after he stops. When the kids get older, the house can be sold and a smaller property purchased which would also release some money to be put into savings.

I have elderly parents who don't own their own home they live in rented council property and have a terrible time on the bread line - we help a lot, but I don't want that for us when we are older, so having our own home outright is really important. Just wish there was another way, seems a lot to lose on Tax.....

NedS

brunettegirl said:

My Husband is currently 56 and has 3 separate pensions  one is currently £111,000  £112,000 and £8,000 (New work based Pension) He wants to cash in the 2 larger pensions to buy a house. This would mean that the money from his pensions and my savings that we wouldn't need a mortgage, or a very small one. I am worried that  withdrawing the money would cost a HUGE amount in tax. So I have questions Im hoping someone might know please

Besides the huge amount in tax that he would pay, I would be concerned how he expects to support himself in retirement if he were to cash in his pensions now and use the money to buy a house, and in so doing, trigger the MPAA and limit future pension contributions. He doesn't have a huge amount of pension provision anyway, and to give half of it to HMRC is almost certainly not in his best interests - very generous of him towards the rest of us as the government needs all the help they can get at the moment, but definitely not in his best interests.
Pensions are to pay for retirement, not for funding house purchases - that should come out of current income.

Albermarle

Just wish there was another way, seems a lot to lose on Tax.....

When you build up a pension, you get tax relief on contributions. So when you take the pension you have to pay some of it back, although you get the benefit of the 25% tax free.

Normally you would take the pension spread over a long period , so only paying normal tax on the 75% which is taxable, or even no tax if the income is below your personal allowance. So pensions are tax friendly, unless of course you want to cash them all in go........

QrizB

brunettegirl said:

Just wish there was another way, seems a lot to lose on Tax.....

I suspect that, if you do the sums, the mortgage will be cheaper than the tax bill. In fact let me have a go at them.

£224k of pensions (I've added £1000 to make the numbers rounder). Take 25% (£56k) tax free leaves £168k.

I don't know what his employment income is but if it's roughly the national average of £32k, tax on the extra £168k will be about £71k, leaving £97k.

Plus the £56k tax-free means you're getting £153k out of the pension.

Alternatively, Moneyfacts thinks you could borrow £153k for 10 years on a 10-year fix with Barclays at a total finance cost of £32k - less than half the tax you'd otherwise be paying.

fizio

The majority are correct in that this is not a wise strategy  - the optimal way to take a pension and pay very little tax is to do what it was designed for ie small regular withdrawals over a long period. The 25% is a nice perk and can be used to pay off debts/loans etc but the bulk is taxed at marginal rate so withdrawals below the various tax bands (12.5k, 50k, etc) is the best way.