Tax implications of retiring half-way through the tax year?

chubsta

I feel I have a pretty decent grasp of my finances and pension so this question is as a result of someone I work with saying it is an awful thing to retire in October because how it affects how much tax you pay, and that you should only retire at the beginning of a new tax year. So, hoping for some sensible advice!

I am a basic rate tax-payer, intending to retire half-way through the year. Until I retire I will be taxed at 20% of my wages, so surely after I retire I will be taxed at 20% of my pension or is it not as simple as that? Is it actually better to start taking the pension in April?

NedS

There is no simple answer, and will depend on how much you earn, how much pension income you will have once you retire, and what your goals are. Then there will inevitably be considerations other than tax that affect when you would like to retire.

sheslookinhot

The simple answer is your personal tax allowance remains the same, whether it’s taxed on income from an employer or a pension.

german_keeper

There are lots of these kind of things regards pensions and finance.

During my 40 years in the Civil Service I wish I had a quid for every time someone told me that "you've got to take as much lump sum as you can". Then when asked why the answer, if they actually had one, would be "it's tax free and you might die tomorrow". The reality is that for the vast majority it would be a bad decision. Assuming average life expectancy you would receive your index linked pension for 25 years and the commutation rate of 12:1 is rubbish. For some reduced life expectancy or a genuine need for the higher lump sum might make a difference.

There is no obvious reason I can think of why what you have been told would be the case; pension  income is taxed in the same way as earned income. No NI to pay though so that's an advantage of pension income. So I would ask your colleague for the reasoning behind his/her statement. Again as Ned suggests there may be something within your personal circumstances which makes the tax situation a relevant consideration. 

Bimbly

If you want to retire in October, retire in October. Your wellbeing is the most important thing.

It can actually be an advantage, from a tax point of view, to retire half way through the financial year. If you pay tax on your income until retirement in October, then live off savings until April, you will get some tax back come the end of the financial year. If you go straight from employment income to pension income, it's not going to make a lot of difference when you retire from a tax perspective (unless you take a large taxable sum from your pension).

Personally, retiring in the spring appeals because the weather is brightening up then. But if October is the month for you, just do it. Don't hang on for a few months (or go before you're ready) purely because of some minor tax issue.

chubsta

All of the other aspects of my retirement have been worked out in almost infinite detail! I even have spreadsheets that I update according to projected cpi figures etc to give me a good idea as to exactly what I will get, along with projected outgoing etc so all that is covered. So really, it is just about making sure those figures are correct, I cannot see why retiring in October would result in me getting any less than 80% of 1/12 of my annual pension per month but best to check. 

The lump sum vs monthly pension is another thing but giving the devaluation of it compared to increased pension in times of high inflation I feel better to take the greater monthly pension…

Albermarle

Timing can be more of an issue for a 40% taxpayer. Can be a good idea to retire before your annual income ( including any pension) goes above the approx £50K limit. Then assuming you have already paid some 40% tax , you will get a rebate at some later stage.

german_keeper

chubsta said:

The lump sum vs monthly pension is another thing but giving the devaluation of it compared to increased pension in times of high inflation I feel better to take the greater monthly pension…

Yes, wasn't a suggestion, just an example of another thing that gets widely quoted but is probably wrong in most circumstances.

Just one more point based on my experience. I took my Classic pension on partial retirement in 2019 and retired fully on 2 August this year. I am not drawing down my Partnership pension till next April to take advantage of tax rebates as per Bimbly's point above. Loads more tax back than any interest I could have received on the savings I have used.

So from April to August my income was earnings and pension. At the end of August I received my final payslip for 1 day's pay and in early September my online tax account was updated. So I sat back and waited for the tax code on my pension to be updated. Such a simple situation I assumed it would be automated (I used to work for HMRC but not on taxes). October came along and still nothing so I phoned up and gave them the information. The chap I spoke to seemed very proficient and he has certainly got the coding right based on my calculations. But he did say that even in a relatively simple situation like that a phone call is definitely needed.

So I would keep an eye on your personal tax account and make sure the tax position is as you would expect.

Pat38493

I did read on another thread that if you are planning to start taking the benefits on a DB pension scheme that is deferred, you should start taking the benfits on a date in the year that is after the anniversary date of when the pension was originally deferred.  The OP doesn't mention what type of pension is being claimed.  However, that is not a tax issue it's more of an issue with how the additions to the pension due to historical inflation are calculated.

ex-pat_scot

You get to play about with a number of factors when choosing to stop work:

- NI years. It might be advantageous to work for enough of the tax year to qualify for an additional NI year (that's certainly my consideration)
- paying HR tax.  If you are usually a HR taxpayer, then earning enough to hit the cumulative (tax year to date) £50k income threshold means that if you stop, and live on savings (or part of tax free lump sum) until end of tax year, then you'll get a nice tax rebate
- accrued holiday leave. You might want to consider timing of holidays etc - either take an extended one over the summer (perhaps an unpaid leave period) then work out your notice in the Autumn? 
- contribute your entire salary into your pension, if you are able, and stop once you hit the full year AA amount (if you earn more than £40k pa) part way through the year.

sheslookinhot

Pat38493 said:

I did read on another thread that if you are planning to start taking the benefits on a DB pension scheme that is deferred, you should start taking the benfits on a date in the year that is after the anniversary date of when the pension was originally deferred.  The OP doesn't mention what type of pension is being claimed.  However, that is not a tax issue it's more of an issue with how the additions to the pension due to historical inflation are calculated.

I retired on 5th May 22, will start my deferred pension in April 23. Normally paid on last working day in April. I hadn’t considered your information when deciding to start my pension benefits.