Cashing in small pension of 14k at 55 years old.

GiantInflatableWalrus5

Hello everyone,

My 55 year old mother wants to take out her small pension of around £14k. It isn't enough to provide an income and my dad's pension will be able to cover the both of them. They want to take out the whole £14k in one lump sum.

I know they can take 25% out tax free and the remaining pension will be taxed.

They are both directors of a small limited company. My mother is paid basic salary and dividends.

I just have a few questions about this and I don't know enough about pensions to help them:

- Are there any pitfalls to doing this? Anything to watch out for?

- I read that if they transfer the £14k to somewhere like Hargreaves Lansdown and split the pension into different small pots, they would be able to take more tax free. Is this correct and how would it work?

- If they took out 25% tax-free in one tax year, could they take out 25% tax-free in the next tax year?
Would the second tax year's 25% be on the original amount (£14k), or the remaining pension (£10.5k)? 

I apologise if I've worded this in a confusing way. Please let me know if you need any extra information and thanks in advance for the help!

SVaz

You can only ever take a 25% tax free lump sum from an uncrystallised pot once. 

The small pots rule means she won’t be subject to the MPAA,  which would reduce the amount she could put into a pension to £10k a year going forward.  If that’s not an issue then taking the lot, it won’t need splitting into small pots. 

badmemory

Rather than cashing in her pension she would do better to increase it.  If all their pension is dependent on her husband it would be better if they improved hers so that any tax payable would be reduced especially if his pension income would be over c £50k pa.  Also unless she is expected to die first (unusual) then what will her income be as a single person.

Albermarle

GiantInflatableWalrus5 said:

Hello everyone,i 

My 55 year old mother wants to take out her small pension of around £14k. It isn't enough to provide an income and my dad's pension will be able to cover the both of them. They want to take out the whole £14k in one lump sum.

I know they can take 25% out tax free and the remaining pension will be taxed.

They are both directors of a small limited company. My mother is paid basic salary and dividends.

I just have a few questions about this and I don't know enough about pensions to help them:

- Are there any pitfalls to doing this? Anything to watch out for?
The taxable part might tip her into being a higher rate taxpayer, depending on high her other income will be.
Otherwise with one off payments, often too much tax will be taken and she will have to claim the excess back.

- I read that if they transfer the £14k to somewhere like Hargreaves Lansdown and split the pension into different small pots, they would be able to take more tax free. Is this correct and how would it work? 

That is not correct.

- If they took out 25% tax-free in one tax year, could they take out 25% tax-free in the next tax year?
Would the second tax year's 25% be on the original amount (£14k), or the remaining pension (£10.5k)? 

Logically that would not make any sense as ultimately you could withdraw almost the whole pot as tax free cash .
If she took the £3.5k tax free, the rest is taxable whenever it is withdrawn, even if it has grown bigger in the meantime.

I apologise if I've worded this in a confusing way. Please let me know if you need any extra information and thanks in advance for the help!

Some comments above 

Marcon

GiantInflatableWalrus5 said:

Hello everyone,

My 55 year old mother wants to take out her small pension of around £14k. It isn't enough to provide an income and my dad's pension will be able to cover the both of them. They want to take out the whole £14k in one lump sum.

I know they can take 25% out tax free and the remaining pension will be taxed.

They are both directors of a small limited company. My mother is paid basic salary and dividends.

I just have a few questions about this and I don't know enough about pensions to help them:

- Are there any pitfalls to doing this? Anything to watch out for?

Is there a reason? Just because she can once she reaches the magic(!) age of 55 doesn't mean it's a good idea, unless she needs to do so. 

If she has significant interest on her savings, then be aware that the taxable part of her pension withdrawal will count towards her income (her salary will count, dividend income doesn't). She might lose the benefit of the starting rate for savings which she might otherwise have benefited from: https://www.gov.uk/apply-tax-free-interest-on-savings

Sarahspangles

GiantInflatableWalrus5 said:

- Are there any pitfalls to doing this? Anything to watch out for?

55 is a difficult age! State Pension age (SPA) still seems a long way away but it’s a good time to take stock.

If your mum isn’t forecast to receive her full State Pension, but has some years not filled, then that would be a good use of a lump sum, as the payback time is so short. If she and your dad plan to retire at the same time, does that coincide with her SPA?

If your mum wanted to stop working between now and her SPA, how would she fund that? If there may be a year she has no earned income then she could withdraw all of her £14k tax free then. She would have 12,570 Personal Allowance to take as taxable income, but taxed at 0%, plus the 25% tax free. That covers up to £16,760.

If she has no plans other than to save the lump sum, remember that it needs to be working to keep pace with inflation. Savings rates are currently beating inflation, but this isn’t likely to last.

LHW99

If they are both directors of the company, is the company paying into her (both) pensions directly? It reduces the corporation tax for the company, and the company contribution isn't as dependent on salary level as personal contributions would be (still subject to AA though)

Cobbler_tone

Your summary reads as though your mum could be far better off keeping it where it is and paying into it, unless of course she has another active pension she's contributing to. Consider keeping it in the pension wrapper and I'm sure it will be worth more when she needs it.

dunstonh

They are both directors of a small limited company. My mother is paid basic salary and dividends.

Paying into the pension from the limited company is more tax efficient.   

Taking money from the pension and paying tax is pointless unless it is being done to do something justifiable.