Small Pension Pot

Spivo46

I have a small 2nd pension pot worth £5500. This is standalone form my main pension fund. I have not yet taken any taxable pension payment, only a small portion of my tax free allowance. I am retired and aim to earn less than £12570 this tax year. Can i take the 5500 tax free if i stay under £12570? Are there other implications to consider?

Dazed_and_C0nfused

Spivo46 said:

I have a small 2nd pension pot worth £5500. This is standalone form my main pension fund. I have not yet taken any taxable pension payment, only a small portion of my tax free allowance. I am retired and aim to earn less than £12570 this tax year. Can i take the 5500 tax free if i stay under £12570? Are there other implications to consider?

It won't be "tax free".  

It isn't clear if you have taken any TFLS from this "small 2nd pension" but anything other than the TFLS element will be taxable pension income.

How much tax you will pay on that will depend on what other taxable income (and type of income) you have in the same tax year.  It could well be no tax is due.

Once you take £0.01 or more in taxable income (assuming it's not buying an annuity) then you will forever be constrained by MPAA when it comes to making further contributions.

MPAA is currently £10,000.

Ciprico

Is that really correct...? Taking a "small pot" (under 10k) does not trigger MPAA?

FIREDreamer

Ciprico said:

Is that really correct...? Taking a "small pot" (under 10k) does not trigger MPAA?

Correct, and you can have a maximum of three small pots too.

Marcon

FIREDreamer said:

Ciprico said:

Is that really correct...? Taking a "small pot" (under 10k) does not trigger MPAA?

Correct, and you can have a maximum of three small pots too.

Three 'small pots' from personal pensions, plus an unlimited number from occupational schemes (NB: a workplace pension such as a group personal pension is NOT classed as an occupational scheme).

You need to ensure the pension provider knows you wish to use the 'small pots' regime and they have to support such withdrawals (not all providers do).

Albermarle

FIREDreamer said:

Ciprico said:

Is that really correct...? Taking a "small pot" (under 10k) does not trigger MPAA?

Correct, and you can have a maximum of three small pots too.

Also in the past ( before April ) it did not contribute to your LTA % either.
Now similarly the 25% tax free part of a withdrawal under the 'small pot rule'  does not contribute to the max tax free limit for pensions.

You need to ensure the pension provider knows you wish to use the 'small pots' regime and they have to support such withdrawals (not all providers do).

In my limited experience of the retail providers,  Fidelity, HL and A J Bell do have this facility, but Vanguard do not . No idea about any others!
I think only HL will split off three small pots from a bigger one ( seems against the spirit of the rules but they will do it) . Also some platforms that advisors use will do the same.

Spivo46

Albermarle said:

FIREDreamer said:

Ciprico said:

Is that really correct...? Taking a "small pot" (under 10k) does not trigger MPAA?

Correct, and you can have a maximum of three small pots too.

Also in the past ( before April ) it did not contribute to your LTA % either.
Now similarly the 25% tax free part of a withdrawal under the 'small pot rule'  does not contribute to the max tax free limit for pensions.

You need to ensure the pension provider knows you wish to use the 'small pots' regime and they have to support such withdrawals (not all providers do).

In my limited experience of the retail providers,  Fidelity, HL and A J Bell do have this facility, but Vanguard do not . No idea about any others!
I think only HL will split off three small pots from a bigger one ( seems against the spirit of the rules but they will do it) . Also some platforms that advisors use will do the same.

So, for clarity please. If i take the £5500 as a small pot and i remain under my personal tax allowance for the year (£12570), will 75% be taxed, of which i will need to claim back next year? Or, will it all be tax free?

LHW99

If you have no other income, then your "normal tax rate" is zero, so you can claim back the tax. You should be able to do it during the year with the correct form - I expect someone else here will know the correct procedure.

Spivo46

LHW99 said:

If you have no other income, then your "normal tax rate" is zero, so you can claim back the tax. You should be able to do it during the year with the correct form - I expect someone else here will know the correct procedure.

I will have other income that totals under £12570

FIREDreamer

Spivo46 said:

LHW99 said:

If you have no other income, then your "normal tax rate" is zero, so you can claim back the tax. You should be able to do it during the year with the correct form - I expect someone else here will know the correct procedure.

I will have other income that totals under £12570

A small pot always has basic rate tax of 20% (BR code applies) deducted from the 75% taxable element, regardless of the recipient’s tax status. Excess tax needs to be reclaimed by the recipient where app.icable.

xylophone

25% of £5,500 =  £1,375. That is the tax free Pension Commencement Lump Sum.

The balance is £4,125 and is taxable as income in the tax year of receipt.

See 

Tax on trivial commutation and ‘small pots’ lump sum payments

https://www.litrg.org.uk/pensions/pension-withdrawals/small-pensions