Tax on pension

CEON44

Hi. Friend of mine has gotten himself into debt and is trying to work his way out of it. He is in a debt management plan and things aren’t going well for him. His wife of 5 years has recently left him, leaving him with all the rent and other household bills. Anyway he is short of ready cash and has decided to withdraw his work pension in cash early. He is 60. He has been told he will have to pay 20% tax on the pension. Its only about £6000. I would have thought that he was under the limit for tax under capital gains? Or is this counted as income?  Thanks for any advice

QrizB

Pensions are income.

For a bog-standard Defined Contribution pension, 25% of it will be tax-free and the remaining 74% will be taxed as income at your friend's marginal rate.

For a £6000 pot, that's £1500 tax-free and £4500 at (presumably) 20%, so £900 in tax.

Brie

I would suggest that he needs to look again at his DMP and NOT take out any of his pension at this time.  Yes - it's income and would be taxed as such.  

So suggest he go back to the debt advice agency that helped set up the DMP.  Maybe there's a better solution.  Maybe a debt relief order would be better for him.  Suggest he talk to StepChange, NationalDebtline, Community Money Advice, Christians Against Poverty or Citizen's Advice.  Or even suggest he come on here and log info on the DebtFree Wannabe board to get some basic info and budget advice.

You could tell him that he needs to ensure he has money for his "priority" debts.  Rent, Council tax, the things that keep him warm and sheltered.  Anything else is a non priority debt - credit cards, loans, overdraft.  

Pass along the details too for DebtCamel - an excellent website where he can get easy to understand info on the different debt solutions.  Debt solutions - what is your best option?

(if it were me, I'd leave the pension alone as creditors can't touch it.  I'd stop making any payments on the DMP and ensure the rent and CT are covered plus whatever he can afford on the gas & electric making sure he has enough for food and to get to work.  Everything else is much less important.)

CEON44

Thanks for the info folks. I tried to tell him that taking out his pension cash isnt ideal but as his wife took a lot of items from the house he really needs cash to buy things right now. He knows its  not good to take the money now but his attitude is he is clean broke now. So he hopes by taking the money he may be able to restart his life. He has an appointment with the debt people who say he may be better in a different plan now his circumstances have changed. I think he called it an IBA something like that

kimwp

CEON44 said:

Thanks for the info folks. I tried to tell him that taking out his pension cash isnt ideal but as his wife took a lot of items from the house he really needs cash to buy things right now. He knows its  not good to take the money now but his attitude is he is clean broke now. So he hopes by taking the money he may be able to restart his life. He has an appointment with the debt people who say he may be better in a different plan now his circumstances have changed. I think he called it an IBA something like that

IVA? Wouldn't be appropriate for a renter. He needs to make sure he is talking to one of the debt charities and not a company that makes money from selling IVAs. It might be worth him popping onto the debt free wannabe board and getting some help on how best to deal with his situation.