Pensions and tax

tykemum

Hi,

My Dad is looking to retire in Dec of this year. He will have earned roughly £34,500 by the time he comes to retire. We’ve been for a Pensionwise appt to discuss some small DC pots (the majority of his retirement income is from DB pots) and in the appt the advisor mentioned being sure about tax implications of retiring in Dec, it was only mentioned in passing and at the time I didn’t think to question it.

We’re thinking currently that he will draw one of his DB pensions in Dec with a 25% TFLS and an annual pension of around £8,500.

Can anyone shed any light on what tax implications the advisor may have been referring to? 

Thanks in advance.

xylophone

Can anyone shed any light on what tax implications the advisor may have been referring to? 

Other than the fact that the pension income will be taxable income?

Has your father reached SPA?

If not, has he obtained a state pension forecast?

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

Pat38493

If he puts his DB pension into payment in January the pension payments unto April will all be taxed at 20% as his personal allowance was already used up.

If he has any other savings to draw on it might be better to use those till April and/or it could be an option to draw on tax free amount from the DC pots for those 4 months if needed.  Difficult to say without more information and if he is fine with the pension payments of 1st 4 months being taxed at that rate it’s not a huge deal.  

One other small point not tax related is that it’s often better to draw on a DB pension on a date which is after the anniversary date of when the pension was originally deferred as the starting pension will get an extra year of deferred inflation adjustments - again would need to know the exact nature of the DB pensions to be sure.

Edit:  also the tax free lump sum on a DB pension is normally not 25% of anything it is calculated based on scheme commutation rates which may or may not be favourable - unless he desperately needs the lump sum it may be worth checking the commutation rates.

p00hsticks

Pat38493 said:

If he puts his DB pension into payment in January the pension payments unto April will all be taxed at 20% as his personal allowance was already used up.

I'm not sure how that necessarily follows ?

 The OP says that the father will have earned around £34.5k by December, but if that is via a regular (lets assume monthly) PAYE salary then they'll only have used eight or nine twelfths of their personal allowance and the rest should still be available for the remaining months of the tax year to use against the DB pension.

Dazed_and_C0nfused

Pat38493 said:

If he puts his DB pension into payment in January the pension payments unto April will all be taxed at 20% as his personal allowance was already used up.

If he has any other savings to draw on it might be better to use those till April and/or it could be an option to draw on tax free amount from the DC pots for those 4 months if needed.  Difficult to say without more information and if he is fine with the pension payments of 1st 4 months being taxed at that rate it’s not a huge deal.  

One other small point not tax related is that it’s often better to draw on a DB pension on a date which is after the anniversary date of when the pension was originally deferred as the starting pension will get an extra year of deferred inflation adjustments - again would need to know the exact nature of the DB pensions to be sure.

Edit:  also the tax free lump sum on a DB pension is normally not 25% of anything it is calculated based on scheme commutation rates which may or may not be favourable - unless he desperately needs the lump sum it may be worth checking the commutation rates.

No, only the proportion to December will have been used.

One thing to factor in is if the DB pensions normal pension age is January then delaying it until April could mean losing those 3 months of pension as not all schemes will pay the amount for the period the pension wasn't taken.

And even if there is no Personal Allowance left 80% of something is better than 100% of nothing.

Pat38493

p00hsticks said:

Pat38493 said:

If he puts his DB pension into payment in January the pension payments unto April will all be taxed at 20% as his personal allowance was already used up.

I'm not sure how that necessarily follows ?

 The OP says that the father will have earned around £34.5k by December, but if that is via a regular (lets assume monthly) PAYE salary then they'll only have used eight or nine twelfths of their personal allowance and the rest should still be available for the remaining months of the tax year to use against the DB pension.

Understood from a PAYE point of view, but I was looking at it from an overall year perspective - there is not much information provided as I said, but, if the pension is only 8K and that is planned as the only income for the following tax year, he would not pay any tax on pension payments in the following tax year if taking the pension from April onwards.  

Also yes I take the other point form Dazed that if the DB pension has reached NRA and doesn't have increases for taking it late, this is also a factor.

I was just trying to imagine why pensionwise would tell them to consider "tax consequences".

tykemum

Thanks all, my Dad is 63, will be 64 in December. The plan is to retire near/on his birthday. The figures for the DB pension do take into account him taking his pension early.  We’ve done the state pensions forecast, he’s entitled to £185 pw.

I’ll suggest using savings to tide over until April. He has another DB pension which will take him over the PA amount when he draws it so there’s no way of avoiding tax when he’s retired. 

xylophone

We’ve done the state pensions forecast, he’s entitled to £185 pw.

£185.15?

This is shown as his estimate to 5/4/22 and the forecast states that this is the most he can get and he cannot  improve his forecast any more?

Sarahspangles

Is the scenario that your father will be contributing to multiple pensions in the tax year that he plans to retire?  If so then it’s reasonable for the advisor to mention that he needs to avoid contributing (gross) more than his taxable pay.  If his pay is 38,500 the most he can pay into his pension is 80% of this (net) and the rest is made up of the tax relief.

Albermarle

also the tax free lump sum on a DB pension is normally not 25% of anything it is calculated based on scheme commutation rates which may or may not be favourable - unless he desperately needs the lump sum it may be worth checking the commutation rates.

OP - note the comments above . Has your Dad really thought through taking a lower guaranteed pension, by taking the lump sum. If he does not actually need the lump sum for anything specific, then it is not always a good idea to take it.

A lot depends on the commutation rate , which is the lump sum divided by the amount of lost pension. Also whether  he has cash savings and other DC/DB pensions.

tykemum

Thanks everyone, so helpful getting other perspectives.

@xylophone I did a forecast a few weeks ago in preparation for the Pensionwise appt and that was the forecast, it said this was the most he could get.

@Sarahspangles No, once he retires he’ll stop paying into all pensions. He’s only paying into one workplace pension currently 

@Albermarle I think his mind is set on the lump sum, my parents want to do some home renovations and I think he intends to use some of the lump sum to fund them.