Pensions, Tax and debts....how to best make my money work

wsn2000

Hello all.

Newbie here. I've trawled through the forum to find answers but none have hit the spot.

So for context I have the following pensions to date:-

Ukaea final salary DB from 1997 - £10k lump and £4.5k per year payable at 2032
Pension Bee (combo of old DC amounts) - £60k
Current Ave Salary DB with the medical reserch council (MRCPS)- forecast £15k pa at 2039
Full State pension £12k at 2039 (assuming rules as current)

I am currently 53 yrs old. Live and work in England

I'm planning to take all of the DC pension out at 55 to buy a new car and have a damn good holiday before my offspring all grow up (divorced now with 3 kids). From what I've read, I'll receive around £36k after tax.

My questions are

1 - The DC pension withdrawl will take me well over the higher tax threshold as I'm on £47k salary atm. Will this mean that my tax band will change for a year and then decrease back to 20%?. 

2 - Will the pension provider do all of the calculations for me and just give me the balance after the 20/40% deductions and notify HMRC?.

3 - Is it worth defering my Ukaea pension even longer to tie in with my other NRDs, or take it at 60 to get the extra 7 years of income, albeit taxed at 40% when my salary will have gone over the HLT threshold with pay rises over the next 8 years. Surely its worth having those extra years of income!

4 - Are there any drawbacks to buying AVCs to try to keep under the 40% tax threshold whilst working and drawing the DB pension?

I dont pay anywhere near £10k annually into my current DB pension so the limit after withdrawing the DC will not be an issue

I realise that it is seen as a folly to take the DC money out at 55, but I'd much rather have that benefit now when I am younger and able to enjoy it more.

Thank you for taking the time to read this. Any advice would be gratefully received.

Cobbler_tone

wsn2000 said:

1 - The DC pension withdrawl will take me well over the higher tax threshold as I'm on £47k salary atm. Will this mean that my tax band will change for a year and then decrease back to 20%?. 


3 - Is it worth defering my Ukaea pension even longer to tie in with my other NRDs, or take it at 60 to get the extra 7 years of income, albeit taxed at 40% when my salary will have gone over the HLT threshold with pay rises over the next 8 years. Surely its worth having those extra years of income!

4 - Are there any drawbacks to buying AVCs to try to keep under the 40% tax threshold whilst working and drawing the DB pension?

I dont pay anywhere near £10k annually into my current DB pension so the limit after withdrawing the DC will not be an issue

I realise that it is seen as a folly to take the DC money out at 55, but I'd much rather have that benefit now when I am younger and able to enjoy it more.

Thank you for taking the time to read this. Any advice would be gratefully received.

I can't (and not the best person) to unpick everything there.

1. You will pay tax against whatever bracket you are in for the tax year. It would probably be a very bad idea to draw your entire £60k out at once.

3. Depends what happens to your DB if you don't take it at 60...i.e. what will it be at 61 etc? Especially if you are still intending to work and paying 40% tax on it all.

4. I assuming if you do 1. it will stop you being able to buy AVC's. You recognise the £10k allowance once accessing your full DC pot.

I wouldn't do anything until you fully understand the impact of doing each. It might be worth putting your holiday on a 0% credit card, the car on finance and hopefully have the money to clear that off with wages.

The experts will be along soon....but yes, it's a folly.

NoMore

I think most comments are going to be it’s a bit daft to take so much out and pay so much tax and I agree with them but I also suspect you won’t be swayed on it. 

Taking taxable income from the dc pension will trigger the mpaa. Although that won’t affect you at the moment because your are in db scheme, it could affect you in the future if you ever move to a dc scheme as you will limit your contributions to 10k p.a. 

Do you really need a new car ? You could just take out the tax free cash 15k and have a good holiday with the kids and not trigger the mpaa. Not what I would do but at least a bit more sensible than taking all of it. 

greatkingrat

The pension provider does not know your salary and how much tax will eventually be due. They will just use an emergency tax code, which is likely to deduct too little tax. So if you do take it all at once, you need to make sure you keep some aside for when HMRC reconcile all the figures at the end of the year.

Marcon

wsn2000 said:

Hello all.

Newbie here. I've trawled through the forum to find answers but none have hit the spot.

So for context I have the following pensions to date:-

Ukaea final salary DB from 1997 - £10k lump and £4.5k per year payable at 2032
Pension Bee (combo of old DC amounts) - £60k
Current Ave Salary DB with the medical reserch council (MRCPS)- forecast £15k pa at 2039
Full State pension £12k at 2039 (assuming rules as current)

I am currently 53 yrs old. Live and work in England

I'm planning to take all of the DC pension out at 55 to buy a new car and have a damn good holiday before my offspring all grow up (divorced now with 3 kids). From what I've read, I'll receive around £36k after tax.

My questions are

1 - The DC pension withdrawl will take me well over the higher tax threshold as I'm on £47k salary atm. Will this mean that my tax band will change for a year and then decrease back to 20%?. 

2 - Will the pension provider do all of the calculations for me and just give me the balance after the 20/40% deductions and notify HMRC?.

3 - Is it worth defering my Ukaea pension even longer to tie in with my other NRDs, or take it at 60 to get the extra 7 years of income, albeit taxed at 40% when my salary will have gone over the HLT threshold with pay rises over the next 8 years. Surely its worth having those extra years of income!

4 - Are there any drawbacks to buying AVCs to try to keep under the 40% tax threshold whilst working and drawing the DB pension?

1. Tax is levied on a year by year basis, depending on your taxable income in the tax year in question. If your taxable income drops back to a level where only basic rate tax applies, then yes.

2. Your pension provider will pay you 25% tax free with the other 75% taxed at the 'emergency' rate and they will report those figures to HMRC. Anything further is between you and HMRC!

3. Your decision entirely. With zero knowledge of your financial situation or aspirations, it's impossible to answer with any degree of certainty.

4. You can't normally pay AVCs once a pension is in payment, so I'm assuming you mean drawing the Ukaea pension? If you want to keep under the 40% threshold, you can do so by either paying AVCs to your current DB scheme, or making personal contributions to a personal pension of your own choice. It's unlikely your employer would pay to anything other than their own scheme, so if you can make contributions by salary sacrifice, then you'd get an NI saving on top of the tax break.

wsn2000 said:

I dont pay anywhere near £10k annually into my current DB pension so the limit after withdrawing the DC will not be an issue

If you trigger the £10K limit (the Money Purchase Annual Allowance), it doesn't apply to DB schemes - the clue is in the name! 

wsn2000 said:

I realise that it is seen as a folly to take the DC money out at 55, but I'd much rather have that benefit now when I am younger and able to enjoy it more.

Sometimes saving tax isn't the top priority. Only you can decide. If you can mitigate (eg spreading the withdrawal over more than one tax year), so much the better.

One further point - your thread title includes the word 'debts'. You've said nothing about those in your post...

Triumph13

The other key facts we are missing, apart from the elusive 'debts' are your estimated spending now and in retirement.  You are on course for £31.5k gross, £27.7k net from all your DBs and SP.  If you expect that to be plenty, then it doesn't much matter what you do.  If you might need more than that, then you need to be building up your DC funds, not blowing them now.

Similarly, if you have spare cash now, or will have in the final years of your career, will triggering the MPAA be something you regret because it stops you stuffing extra cash into your pension in the run up to retirement.

Qyburn

wsn2000 said:

1 - The DC pension withdrawl will take me well over the higher tax threshold as I'm on £47k salary atm. Will this mean that my tax band will change for a year and then decrease back to 20%?. 

2 - Will the pension provider do all of the calculations for me and just give me the balance after the 20/40% deductions and notify HMRC?.

The pension scheme will run the withdrawal through their payroll using whatever rule HMRC has told them to use. The amount of tax will almost certainly be incorrect as they won't be able to take account of your salary.

From my experience and from what I've read they're likely to apply a "month one" code which means taxing as if they expect you to receive that amount every month.  If they do that you'll be massively over taxed but can reclaim later.

Could you split the withdrawal over two tax years, so less is taxed at 40%?

Bluebell1000

If you're keen to get a new car, you might want to look at a salary sacrifice car, if your employer offers that? It has tax advantages and means you wouldn't need to take the whole DC pension out.

leosayer

I found that in the runup to retirement, I framed any major expenditure in terms of how much annual retirement income it would burn up. For example, if I needed £50k per year of retirement income, then spending £50k now would set my retirement date back by 1 year.

What is more important to you? Retiring or a better car?

You might find the vide below useful.

https://youtu.be/WbBVoe9Lr94?si=0c_ZvZoclvU2RaB0

Having said all that sensible stuff, I am a petrolhead myself so am itching to know what car you have in mind. I might be able to suggest some more reasonably priced alternatives.

Marcon

Bluebell1000 said:

If you're keen to get a new car, you might want to look at a salary sacrifice car, if your employer offers that? It has tax advantages and means you wouldn't need to take the whole DC pension out.

...and means you won't actually own the car, since it'll be done by a lease agreement, which doesn't confer ownership.

Triumph13

Qyburn said:

wsn2000 said:

1 - The DC pension withdrawl will take me well over the higher tax threshold as I'm on £47k salary atm. Will this mean that my tax band will change for a year and then decrease back to 20%?. 

2 - Will the pension provider do all of the calculations for me and just give me the balance after the 20/40% deductions and notify HMRC?.

The pension scheme will run the withdrawal through their payroll using whatever rule HMRC has told them to use. The amount of tax will almost certainly be incorrect as they won't be able to take account of your salary.

From my experience and from what I've read they're likely to apply a "month one" code which means taxing as if they expect you to receive that amount every month.  If they do that you'll be massively over taxed but can reclaim later.

Could you split the withdrawal over two tax years, so less is taxed at 40%?

OP only has about £6k pa unused in their 20% band (£47k salary less 6.5% pension contributions).  So, unless they wait until after retirement, it isn't going to make a huge difference - unlike some of the 'I want it now' people we get on here. But every year they do spread it over saves £1,200 in tax, which is not to be sniffed at.