Pension lump sum and personal allowance

Mikeef

I'm posting this on behalf of my Mother, who is in her mid 70's. She retired last year and has a personal pension pot of around 10k that she is not taking from yet. She also receives the state pension. She want to take out as much as she can from the 10k pot.

My understanding is she can take 25% tax free per tax year. If she takes more than that, she will be taxed 20% on anything over the 25%. i.e. £2500 tax free and £7500 subject to 20% tax.

Does her personal allowance not mean that she can take up to her personal allowance before tax? So if it is the standard rate of around £12500, then she could take all 10k out of her pension pot and not be liable to tax? I understand her state pension is taxed at source so she will already have paid the tax on that, or is the state pension taxed based on your personal allowance as well.

Its worth noting she was working from April 2023 to Nov 2023 so will have been paying tax via her PAYE from that employment.

Many thanks

Mike 

NoMore

State pension is income and also uses the personal allowance.  So depending on how much state pension she gets will determine how much, if any, personal allowance you have left to apply to the pension pot.

Also if she intends to take it this tax year, her income from employment from April 2023 would also have counted against the personal allowance

None of this affects the 25% tax free, only the taxable part of the pension

cloud_dog

Mikeef said:

I'm posting this on behalf of my Mother, who is in her mid 70's. She retired last year and has a personal pension pot of around 10k that she is not taking from yet. She also receives the state pension. She want to take out as much as she can from the 10k pot.

My understanding is she can take 25% tax free per tax year. If she takes more than that, she will be taxed 20% on anything over the 25%. i.e. £2500 tax free and £7500 subject to 20% tax.

Does her personal allowance not mean that she can take up to her personal allowance before tax? So if it is the standard rate of around £12500, then she could take all 10k out of her pension pot and not be liable to tax? I understand her state pension is taxed at source so she will already have paid the tax on that, or is the state pension taxed based on your personal allowance as well.

Its worth noting she was working from April 2023 to Nov 2023 so will have been paying tax via her PAYE from that employment.

Many thanks

Mike 

She can take up to £12570 and not be tax (eventually*), except that her SP will be grabbing some of that Personal Allowance.  So it really depends on how much her SP is?  You would then need to deduct that from her Personal Allowance to understand what tax allowance she has remaining.

If we assume her SP is £10k pa, that would leave £2570 as tax free bandwidth she could use.  If you wanted to take the whole £10k out as efficiently as possible you would withdraw £3426.66pa (£2570 liable for tax but under her Personal Allowance, and the remaining £856.66 being the 25% TFLS).  This withdrawal method is known as UFPLS.

There is a 'small pots rule', which allows a withdrawal up to £10 (x three occurrences), but this is not something I have investigated further to understand the tax implications.  There are very knowledgeable posters on this board who will be able to confirm.


* - If this were the first withdrawal, your mother would likely be taxed on a month1 basis (emergency tax), so she would pay tax but would be able to claim it back from HMRC; I am ignoring SP money in this statement.

NoMore

cloud_dog The small pots rule does not change the tax treatment (still 25% tax free, 75% taxable), it prevents the MPAA being triggered and also any use of LTA (moot now probably). Doesn't sound like that's a problem for this poster, so unlikely to make a difference.

molerat

Mikeef said:

I'm posting this on behalf of my Mother, who is in her mid 70's. She retired last year and has a personal pension pot of around 10k that she is not taking from yet. She also receives the state pension. She want to take out as much as she can from the 10k pot.

My understanding is she can take 25% tax free per tax year. If she takes more than that, she will be taxed 20% on anything over the 25%. i.e. £2500 tax free and £7500 subject to 20% tax.

Does her personal allowance not mean that she can take up to her personal allowance before tax? So if it is the standard rate of around £12500, then she could take all 10k out of her pension pot and not be liable to tax? I understand her state pension is taxed at source so she will already have paid the tax on that, or is the state pension taxed based on your personal allowance as well.

Its worth noting she was working from April 2023 to Nov 2023 so will have been paying tax via her PAYE from that employment.

Many thanks

Mike 

One big misunderstanding there.  The state pension is NOT taxed at source and is received gross so that needs to be taken into account when working out how much she can take tax free.  Her personal allowance is reduced by the amount of SP meaning she will be taxed on her total income through her employment or private pension income.

Mikeef

Thanks all. Some good advice here. I have set my mother up with her HMRC government gateway so she can check all the details. I will advise her to take 25% now, as that's tax free and then after further investigation in to her personal allowance and state pension, she can decide what she wants to do. Is the 25% a one off or is it every tex year?

QrizB

Mikeef said:

Thanks all. Some good advice here. I have set my mother up with her HMRC government gateway so she can check all the details. I will advise her to take 25% now, as that's tax free and then after further investigation in to her personal allowance and state pension, she can decide what she wants to do. Is the 25% a one off or is it every tex year?

It's a one-off.

If her personal.pension is worth £10k, she can take £2.5k tax-free and the remaining £7.5k is taxable.

You say she's in her mid 70s. Is she under 75 and doing the £2880/3600 thing?

Mikeef

QrizB said:

Mikeef said:

Thanks all. Some good advice here. I have set my mother up with her HMRC government gateway so she can check all the details. I will advise her to take 25% now, as that's tax free and then after further investigation in to her personal allowance and state pension, she can decide what she wants to do. Is the 25% a one off or is it every tex year?

It's a one-off.

If her personal.pension is worth £10k, she can take £2.5k tax-free and the remaining £7.5k is taxable.

You say she's in her mid 70s. Is she under 75 and doing the £2880/3600 thing?

Shes over 75 and I have no idea what the 2880/3600 is. 

NoMore

If she's over 75 it doesn't matter, but to explain, up to the age of 75, non earners can still get tax relief on up to £3600 (£2880 net) from a pension.

So it can be advantageous to pay £2880 into a pension every year to get the tax relief. However no tax relief after age 75.

xylophone

You say that she wishes to access as much of the  £10,000 pension as possible.

She may take the whole of it if she wishes but only the 25% Pension Commencement Lump Sum (£2,500) is tax free - the balance is taxable as income in the tax year of receipt.

The pension provider is likely to apply tax at emergency rate which may not be appropriate to her circumstances. See

https://techzone.abrdn.com/public/pensions/emergency-tax-and-pensions-guide