Cashing in a pension

lookstraightahead

Hello all

im 55 in January and I have a pension pot that I want to cash in. It's £42000 and I work part time. My earnings up to April 2024 will be £16000. This means (I believe) that I don't hit the 40% tax bracket as 25% will be tax free. 

Am I right in my calculations, and also do I get taxed 40% initially and then I have to claim back from HMRC?

Brie

I don't think you will be able to "cash it in".  You might put it into drawdown and take it over 2 - 3 years with the 25% TFLS.  If you can do it over 2 years you might take £21k in this tax year of which £15750 would be taxable so easily within the lower tax limit.  And then do the same again in the next tax year.  So half in February (2023/4) and half in April (2024/5).

lookstraightahead

Thank you - is there a reason why I can't take it all out ? Sorry, it's an old private pension that I don't contribute to

molerat

The withdrawal methods allowed all depend on the type of pension it is which you have not stated.

If it is purely a cash pot pension then 25% will be tax free leaving £31.5K subject to tax.  Depending on the exact circumstances then the payment may be taxed on a 1257LM1 or BRM1 basis meaning in the former £1048 is tax free and the remainder taxed as a monthly payment, the latter there is no tax free allowance and 20% tax is applied to the whole amount.  The actual tax due will need to be reconciled at a later date as you may have under or over paid tax.

If taxed at 1257LM1 then £12553 tax will be deducted.  Your total tax due for the year would be £6984 of which £684 would be paid from your employment so a refund of £5569 would be due.

If taxed at BRM1 then £6300 tax would be deducted which would be the correct amount.

lookstraightahead

Thank you. It's a Zurich personal pension plan from 1994 that I havent paid into for years. They stated they I can only take all or nothing through themselves with this particular plan 

Brie

lookstraightahead said:

Thank you - is there a reason why I can't take it all out ? Sorry, it's an old private pension that I don't contribute to

Mostly the reasoning is that you have a pension to support you in your old age so you are normally expected to use it to provide ongoing income.  The TFLS is allowed I think as a sweetener for not being able to take the lot.  

If it is a private pension it may well be similar to a occupational defined contribution pension scheme in which you put money to be invested in hopes that it will grow with inflation. 

The only schemes that I'm aware of that allow you to take the whole thing are referred to as "trivial" pensions.  As I recall a few years back the upper limit on these was £17k and above that you had to take it as a pension, not simply withdraw it.  The only exception to this might occur if you had a very very limited time to live - which I hope is not the case.  

lookstraightahead

Brie thank you but I'm really confused. I have a local government pension that I'm paying into for retirement, and actually I do have a trivial pension too which I haven't cashed in whych is about £8000, along with a really small pension pot of £3000 from when I started work. Zurich have informed me that for this personal pension of £42000 I can't withdraw 'some' of it, but I can transfer it to another provider, or cash it in . Maybe I've misunderstood them.

I will phone them tomorrow x

molerat

lookstraightahead said:

Thank you. It's a Zurich personal pension plan from 1994 that I havent paid into for years. They stated they I can only take all or nothing through themselves with this particular plan 

If they have stated that it is available as a lump sum then that is what is allowed, some older pensions have some strange rules.  Another option would be to move it into a SIPP and take what you want / need whenever you want to.  Do you need / want it all in one go ?  The only problem could be that once you take any taxable cash you are limited to putting £10K pa into a DC pension - that may or may not be of concern to you.

lookstraightahead

Thank you molerat - initially when I spoke to them I only wanted to take some out but they said I'd have to transfer it to another scheme. My brain is on fire 😬. I'm also desperately trying to understand my LGPS one as well. One day at a time. 

SVaz

Transfer it into a Sipp then you can do whatever you want with it.

Albermarle

Brie said:

lookstraightahead said:

Thank you - is there a reason why I can't take it all out ? Sorry, it's an old private pension that I don't contribute to

Mostly the reasoning is that you have a pension to support you in your old age so you are normally expected to use it to provide ongoing income.  The TFLS is allowed I think as a sweetener for not being able to take the lot.  

If it is a private pension it may well be similar to a occupational defined contribution pension scheme in which you put money to be invested in hopes that it will grow with inflation. 

The only schemes that I'm aware of that allow you to take the whole thing are referred to as "trivial" pensions.  As I recall a few years back the upper limit on these was £17k and above that you had to take it as a pension, not simply withdraw it.  The only exception to this might occur if you had a very very limited time to live - which I hope is not the case.  

Sorry but this is entirely incorrect.
Anybody can take out all of a DC pension pot if they want as long as they are 55.
25% tax free and 75% taxable. The actual amount of tax to be paid will depend on the individuals tax position, although they may pay more initially and have to claim some back.

It is not normally recommended to cash in pensions that you might need later in life but there is nothing stopping someone doing it when they reach 55. Plus you will have the £10K MPAA restriction outlined by @molerat

OP - It is not normally recommended to cash in pensions that you might need later in life, but there is nothing stopping someone doing it when they reach 55. However you will have the £10K MPAA restriction outlined by @mol@molerat
You might consider transferring the pension pot, which is very easy to do online nowadays.