Pension I forgot

billozz

sheramber said:

Any money you take above the tax free amount will be added to your self employed income for the year in which you take it. and taxed accordingly.

So at my normal tax level 25%and not 40% as I was told by pension company? 

billozz

xylophone said:

Have you obtained a state pension forecast?

https://www.gov.uk/check-state-pension

What exactly does it say?

Do you have other pension provision apart from the forgotten pension?  If so, what kind?

Are you currently employed/paying/credited with NI?

Are you currently contributing to a pension scheme? If so, what kind?

I've looked and it says I'll get£185.15 from arch 2024. I have another pension which has a pot of just over£10,000,i am self employed and yes paying NI, I only contribute to state pension nothing else. Thanks for the reply 

billozz

Dazed_and_C0nfused said:

billozz said:

molerat said:

Assuming it is a straightforward money pot 25% will be tax free and the rest added to your income for the year and taxed accordingly.  That means £7500 tax free and £22500 taxed.  If you are working then that would likely mean at least £4500 tax.

I spoke to the pension company and they said 25%tax free, then I have to pay 40% tax on the balance and claim it back, is that right? 
Not sure if it makes any difference but I'm self employed, thank you for your Reply 

It would be very unusual to pay 40% tax unless it's an ongoing pension and you are a higher rate payer.

If you take a large payment you might pay some 40% tax.  And some 20% tax.  And some without any tax at all.

And as a self employed person you wouldn't normally be able to claim anything back in the way I think they meant.

You simply include the taxable amount and tax deducted on your Self Assessment return and it forms part of your Self Assessment calculation.  If that means you have overpaid overall then you would get a refund.  But it could just as easily be that you have a much smaller Self Assessment bill to pay.

The term they used was that I would pay tax on the balance (after 25%deducted) at emergency rate which is 40%?

Pat38493

billozz said:

Dazed_and_C0nfused said:

billozz said:

molerat said:

Assuming it is a straightforward money pot 25% will be tax free and the rest added to your income for the year and taxed accordingly.  That means £7500 tax free and £22500 taxed.  If you are working then that would likely mean at least £4500 tax.

I spoke to the pension company and they said 25%tax free, then I have to pay 40% tax on the balance and claim it back, is that right? 
Not sure if it makes any difference but I'm self employed, thank you for your Reply 

It would be very unusual to pay 40% tax unless it's an ongoing pension and you are a higher rate payer.

If you take a large payment you might pay some 40% tax.  And some 20% tax.  And some without any tax at all.

And as a self employed person you wouldn't normally be able to claim anything back in the way I think they meant.

You simply include the taxable amount and tax deducted on your Self Assessment return and it forms part of your Self Assessment calculation.  If that means you have overpaid overall then you would get a refund.  But it could just as easily be that you have a much smaller Self Assessment bill to pay.

The term they used was that I would pay tax on the balance (after 25%deducted) at emergency rate which is 40%?

Probably what they mean is that if you take taxable income out of the pension, the pension company won’t immediately know your tax situation and so they have to use that emergency tax code until HMRC give them an appropriate tax code to use.

This means that they would potentially retain 40% of the money for HMRC.  However, if they have wrongly taxed it and your current tax rate is 20% (and this pension amount doesn’t put you into 40%), you can then claim that money back in your tax return.

I’ve seen in other posts that you can fill in a form to get the overpaid tax back immediately rather than waiting to your tax return, but I’m not sure if that still applies when you are self employed.

xylophone

Let's say that the value of the pension is £30,000 and you decide that you want to take the whole of it now.

As I understand it,  £7,500 tax free.

The balance of £22,500 is taxable as income in the year of receipt.

The pension provider would apply tax on the balance as illustrated here

https://adviser.royallondon.com/technical-central/pensions/benefit-options/emergency-tax-and-lump-sum-withdrawals/

As you can see, some of the pension would be taxed at higher and additional  rate which might not be appropriate for your circumstances.

I would estimate that you would receive approx £21,600 after tax as applied above.

Presumably you will be completing a self assessment return for HMRC at the end of the tax year so that any adjustment for under or overpayment of tax could be made.

wjr4

billozz said:

L9XSS said:

As above, but take the 25% tax free lump sum and leave the remainder invested. Then drawdown the remaining £22,500 as and when required. If your not working but due to receive the State pension then you could “top up” your state pension from the £22,500 and not pay any tax if you don’t exceed the personal allowance of £12570 per annum.
All theoretical of course as I’m assuming the following:
A) Your not in employment 
You qualify for the State pension
C) Other variables.
let us know your current position as you could easily mitigate the £4500 tax bill.

I am self employed, I am 65 next year but don't get state pension until the year after. 

Why don’t you wait until you stop working to take it? You don’t need to fully encash it. 

Albermarle

Pat38493 said:

billozz said:

Dazed_and_C0nfused said:

billozz said:

molerat said:

Assuming it is a straightforward money pot 25% will be tax free and the rest added to your income for the year and taxed accordingly.  That means £7500 tax free and £22500 taxed.  If you are working then that would likely mean at least £4500 tax.

I spoke to the pension company and they said 25%tax free, then I have to pay 40% tax on the balance and claim it back, is that right? 
Not sure if it makes any difference but I'm self employed, thank you for your Reply 

It would be very unusual to pay 40% tax unless it's an ongoing pension and you are a higher rate payer.

If you take a large payment you might pay some 40% tax.  And some 20% tax.  And some without any tax at all.

And as a self employed person you wouldn't normally be able to claim anything back in the way I think they meant.

You simply include the taxable amount and tax deducted on your Self Assessment return and it forms part of your Self Assessment calculation.  If that means you have overpaid overall then you would get a refund.  But it could just as easily be that you have a much smaller Self Assessment bill to pay.

The term they used was that I would pay tax on the balance (after 25%deducted) at emergency rate which is 40%?

Probably what they mean is that if you take taxable income out of the pension, the pension company won’t immediately know your tax situation and so they have to use that emergency tax code until HMRC give them an appropriate tax code to use.

This means that they would potentially retain 40% of the money for HMRC.  However, if they have wrongly taxed it and your current tax rate is 20% (and this pension amount doesn’t put you into 40%), you can then claim that money back in your tax return.

I’ve seen in other posts that you can fill in a form to get the overpaid tax back immediately rather than waiting to your tax return, but I’m not sure if that still applies when you are self employed.

Not sure anything connected to HMRC happens immediately.
Pension Drawdown Tax Reclaim — MoneySavingExpert Forum

dunstonh

billozz said:

sheramber said:

Any money you take above the tax free amount will be added to your self employed income for the year in which you take it. and taxed accordingly.

So at my normal tax level 25%and not 40% as I was told by pension company? 

There is no 25% tax band for income tax.   75% of the pension will be added to your self employment income.  If your total income goes into the higher rate band, than that slice will have 40% tax taken against it.

If you don't need the money, don't take it.     Wait until you need it (and you can also take chunks over multiple tax years).