Pensions & Tax

DiddlyDiddly

Hi
I have a very small pension that is due next year when I turn 60. I have already taken 25% lump sum at 55. 

Due to the amount that has now accumulated its not worth me breaking it down into small amounts over months but more of a benefit to me if I take it as a lump sum.
I had thought of taking it early due to needing a few things this year. 
I was under the impression that I have to pay 25% tax on this but my friend doesnt believe I will pay much tax on it due to my situation. 
I am on long term sickness benefits = low income and have been for years.  (I am aware of the savings threshold for these). 

Can anyone advise please

Many thanks

Dazed_and_C0nfused

DiddlyDiddly said:

Hi
I have a very small pension that is due next year when I turn 60. I have already taken 25% lump sum at 55. 

Due to the amount that has now accumulated its not worth me breaking it down into small amounts over months but more of a benefit to me if I take it as a lump sum.
I had thought of taking it early due to needing a few things this year. 
I was under the impression that I have to pay 25% tax on this but my friend doesnt believe I will pay much tax on it due to my situation. 
I am on long term sickness benefits = low income and have been for years.  (I am aware of the savings threshold for these). 

Can anyone advise please

Many thanks

Do you have any other taxable income?

Some DWP benefits are taxable, some aren't.

Where have you read you might have to pay 25%?  There is no 25% income tax rate, not even for Scottish taxpayers!

How small exactly is this very small pension fund?

DiddlyDiddly

Thanks for replying. 

I really do not know where I get 25% from.. unless I am getting confused with taking 25% out! 

I currently have ESA Income related (support group if that helps) and that is all my income.

The pension currently stands at just shy of  £8000. I know my savings limit is £6000 but I do intend to pay for my funeral from this amount as morbid as that sounds lol

Thanks again

Marcon

DiddlyDiddly said:

Hi
I have a very small pension that is due next year when I turn 60. I have already taken 25% lump sum at 55. 

Due to the amount that has now accumulated its not worth me breaking it down into small amounts over months but more of a benefit to me if I take it as a lump sum.
I had thought of taking it early due to needing a few things this year. 
I was under the impression that I have to pay 25% tax on this but my friend doesnt believe I will pay much tax on it due to my situation. 
I am on long term sickness benefits = low income and have been for years.  (I am aware of the savings threshold for these). 

Can anyone advise please

Many thanks

If your taxable income in the tax year in which you draw the whole 'pot' exceeds £12,570, then you will pay basic rate tax on anything above that figure (clearly you aren't into higher rate tax, from what you've said).

Assuming you've made no further contributions since you took the 25% lump sum from your pension, the whole pot will be potentially taxable. Whether it is actually taxed depends on your other income. The following gives a good summary of which state benefits are taxable and which aren't:

https://www.litrg.org.uk/benefits/state-benefits

Depending on the size of your pension pot, you may find it more tax efficient to spread your withdrawals over more than one tax year, assuming your provider offers that facility.

Dazed_and_C0nfused

DiddlyDiddly said:

Thanks for replying. 

I really do not know where I get 25% from.. unless I am getting confused with taking 25% out! 

I currently have ESA Income related (support group if that helps) and that is all my income.

The pension currently stands at just shy of  £8000. I know my savings limit is £6000 but I do intend to pay for my funeral from this amount as morbid as that sounds lol

Thanks again

Income related ESA isn't taxable.

https://www.gov.uk/income-tax/taxfree-and-taxable-state-benefits

So if that means your only taxable income is £8,000 from the pension then although you pay a lot of tax when withdrawing it it would all be automatically refunded by HMRC in due course.  Or you claim a refund if you didn't want to wait for HMRC.

Taking this money in one go will forever limit how much you can contribute to a defined contribution pension in the future.

DiddlyDiddly

Thank you both for your input .. it has really helped.