Paying income tax on your private pensions

Mr_Benn

Im currently debating on starting to take my defined benefit pension. Its not massive amounts (about £1,700 per year). Im 64 years old. Im still working full time, so any income would be taxed. I will probably invest the Tax Free lump Sum (about £10k) in a passive global fund tracker. 

What Im trying to get my head round is if decide to wait until Im 67 to take it, then with the State Pension almost the same amount as the lower tax threshold, plus an Annuity, will I end up paying tax on it anyway, and therefore may as well take it now ? 

I know we cant say for certain if the tax thresholds will rise in 2028, but the SP will also have risen hopefully.

Thanks in advance.

TheSpectator

Is the pension payable in full now without any actuarial reduction? Will it grow if left untouched?

MallyGirl

do you earn enough that you would pay higher rate tax on it now, but would only pay basic rate tax on it in retirement?

Cobbler_tone

For me it all depends on whether you are firmly in the 20% bracket, working or not, along with any reduction on your DB…i.e. is the NRA 65. Assuming you stay within the 20% they’ll be no major difference in taking it now. Maybe treat yourself to an hours reduction if possible.

Sarahspangles

Assuming you would be paying 20% tax on it whether you commence it now or later, what you plan to do with it is more significant than when it starts. Most DB pensions don’t penalise earlier drawdown, it’s just the same money spread over a longer period.

If you drew it to save, and would end up paying more tax on savings interest, that might not be worthwhile. But if it enables you to make efficient use of your ISA allowance, that might be different.

DRS1

Any reduction for taking it early is the first thing to consider.
But if you do take it now while still working you could use the extra income to increase your other pension contributions (assuming you are not already contributing the most allowed).  That could mitigate any extra tax you would be paying.

Mr_Benn

Thanks guys.  i was hoping to have some more information having spoken to the company who manage the pension on my old companys behalf.  Unfortunately, its Capita, who manage lots of other companys pensions. When I call them , they have no idea about the actual pension I have , just vague ideas / guesses. So anything specific just doesnt get answered. Ive tried messaging them instead but had no reply after over a week.

Anyway,  yes Im in the 20% tax bracket, and wont go into the higher tax bracket. There is no mention of being charged for early withdrawal. ( I will try and check this though).  My plan is to take the PCLS and put into my shares ISA and invest in the HSBC global fund.  The pension i get each month will currently be taxed at 20%. When Im 67 in a few years, my SPension will put me close the tax threshold, so i will still probably pay 20% on this pension.

The pension has a guaranteed increase each year of between 3% to 5% based on the RPI.  When I look at last years valuation (how much id get per year), its actually gone up by about 6.7% compared to this years valuation . I called Capita to understand this, but they just said 'there are other factors that affect the rise'. But he couldnt answer if that happens going forward (ie he was guessing).  

Hoenir

Mr_Benn said:

When I look at last years valuation (how much id get per year), its actually gone up by about 6.7% compared to this years valuation . I called Capita to understand this, but they just said 'there are other factors that affect the rise'. But he couldnt answer if that happens going forward (ie he was guessing).  

That was a historic inflation rate. May well be that prior to drawing the pension there's no cap on the increase. Though a guaranteed 3% to 5% sounds an odd mechanism. Normally it's floating or guaranteed either with a cap. 

Mr_Benn

Ive now got some more information on my DB pension.

Until i take the pension, it increases by an annual  'retirement factor'. Its currently 1.2 , but will be appx 1.6 when Im 67.  Once the pension starts, it increases by upto 5% based on RPI.

Ive tried do some caclutions to work out if Im better holding fire  ( I dont 'need' the money right now).

So if I take it now I get a tax free sum of £11.5k and also £1,700 per year.

If I wait until in 67 , theyve estimated I will get  £14.4k and £2,150 per year.

I will be paying 20% tax on the £1,700 if I take it now , and if I take it when I retire it depends on the tax threshold and SP changing, so I guess a small part of it might be tax free.

Take now = Ive added 3 years of £1,360 (£1,700 taxed) and 3 years of 4% interest on the £11.5k sum. Total  £5,460.

Take in 2028 = Based on getting 4% interest on the £14.4k lump sum (£576) and getting £400 more a year = appx £1,000 more each year than if Id taken it now.

So Ive reckoned it would take about 5 years before I break even , between taking it now or later, but after those  years, of course I will get more if Ive held fire until 2028.

I know its a bit guess work, but just wondered if my theory work is close to being right please  ?

(just like being back at school - lol ) !