Pension Help

superuser19375

I think i know the answers to some of this but could help with some clarification.

My FIL is bed bound, disabled and retired.  Both my MIL and FIL live with my wife and I.

My wife and MIL have authority over his financial affairs.

His financial situation is that he gets the state pension, his army pension and PIPs payments - i think this totals in the region of £2300 a month.  My MIL is retired also and get the state pension

We recently found out he had a pension from a job he did after he left the army, which is valued at £37k.

My MIL is looking at cashing in the whole pension, as the annuity on that amount wouldn't be great and as a household we are reasonably well off.  However a lump sum would be of more use.

Am I right that 25% can be taken tax free and at the point of taking the money, the rest would be taxed at (Likely) emergency rates and we would need to claim that tax back from HMRC. And would only his situation be taken into account when reclaiming the tax ie irrespective of the household situation?

unforeseen

How much do his state.& army pension come to? You may find he is close to the personal allowance and there may be no tax rebate on the pot. 

Linton

Is the pension defined benefit (eg "final salary") or Defined Contribution (an invested lump sum)?

Asuming the latter then yes, he could take 25% tax free and the rest is taxed as income, initially at emergency rates.  Only his tax situation is taken into consideration, MILs situation is irrelevent. Note that £2300X12+£37000X0.75=£55350 which would put him into higher rate tax.  So it would be worthwhile splitting the taxable withdrawal over 2 tax years.

Pat38493

Linton said:

Is the pension defined benefit (eg "final salary") or Defined Contribution (an invested lump sum)?

Asuming the latter then yes, he could take 25% tax free and the rest is taxed as income, initially at emergency rates.  Only his tax situation is taken into consideration, MILs situation is irrelevent. Note that £2300X12+£37000X0.75=£55350 which would put him into higher rate tax.  So it would be worthwhile splitting the taxable withdrawal over 2 tax years.

I think that PIP is not taxable (?) so it might not be that, but nevertheless if the whole lump sum is taken at once, as you say the 75% would be taxed at his marginal rate, so you would need to know how much taxable earnings he has in the year - it may be worth spreading the withdrawal over more than one tax year to avoid larger tax charge.

superuser19375

Pat38493 said:

Linton said:

Is the pension defined benefit (eg "final salary") or Defined Contribution (an invested lump sum)?

Asuming the latter then yes, he could take 25% tax free and the rest is taxed as income, initially at emergency rates.  Only his tax situation is taken into consideration, MILs situation is irrelevent. Note that £2300X12+£37000X0.75=£55350 which would put him into higher rate tax.  So it would be worthwhile splitting the taxable withdrawal over 2 tax years.

I think that PIP is not taxable (?) so it might not be that, but nevertheless if the whole lump sum is taken at once, as you say the 75% would be taxed at his marginal rate, so you would need to know how much taxable earnings he has in the year - it may be worth spreading the withdrawal over more than one tax year to avoid larger tax charge.

Just checked and PIP is not taxable, so about £1600 as taxable income a month.
£37000*0.75 = £27,500 (ish)

12*£1600 = £19000

Total = £46,500

So, we could take the whole lot and stay within the £50k limit for higher tax bracket

Albermarle

superuser19375 said:

Pat38493 said:

Linton said:

Is the pension defined benefit (eg "final salary") or Defined Contribution (an invested lump sum)?

Asuming the latter then yes, he could take 25% tax free and the rest is taxed as income, initially at emergency rates.  Only his tax situation is taken into consideration, MILs situation is irrelevent. Note that £2300X12+£37000X0.75=£55350 which would put him into higher rate tax.  So it would be worthwhile splitting the taxable withdrawal over 2 tax years.

I think that PIP is not taxable (?) so it might not be that, but nevertheless if the whole lump sum is taken at once, as you say the 75% would be taxed at his marginal rate, so you would need to know how much taxable earnings he has in the year - it may be worth spreading the withdrawal over more than one tax year to avoid larger tax charge.

Just checked and PIP is not taxable, so about £1600 as taxable income a month.
£37000*0.75 = £27,500 (ish)

12*£1600 = £19000

Total = £46,500

So, we could take the whole lot and stay within the £50k limit for higher tax bracket

Assuming his State and army pension together = £19K pa, then you are right.
However when he gets the £27.5K the PAYE system will assume he will get that every month of the remaining tax year, and tax him accordingly. If you want avoid that and having to reclaim it ( although it is not that difficult ) you can delay the withdrawal until March ( last month of the tax year) .

squirrelpie

Albermarle said:

If you want avoid that and having to reclaim it ( although it is not that difficult ) you can delay the withdrawal until March ( last month of the tax year) .

Alternatively you could withdraw a small amount from the pension first, after which HMRC will issue a tax code to the provider that will hopefully mean that the correct amount of tax is taken when a larger second withdrawal is made.