Cashing in pension

omg29

I want to cash in my whole pension( dont worry i have sufficient other pensions to fund me later on). My fund is £118k, i understand that i will have to pay the highest tax band , as my wages are currently 332k per year. How does the tax work out, so i pay  tax 75%on the pension, and higher tax on my wages

HappyHarry

omg29 said:

I want to cash in my whole pension( dont worry i have sufficient other pensions to fund me later on). My fund is £118k, i understand that i will have to pay the highest tax band , as my wages are currently 332k per year. How does the tax work out, so i pay  tax 75%on the pension, and higher tax on my wages

25% will be tax free and you will pay 45% tax on the remainder.

Exodi

If you're already deep into the additional rate band (as you would be earning £332k per year!), then you'd pay 45% on everything outside the LSA.

Is £332k a typo by the way? Aside from being astronomically high that very few in the UK would earn outside of CEO's, footballers and plastic surgeons - your forum signature suggests you're saving for a house and have £1k out of £15k saved?

Appreciate your forum sig might be quite old and you could have had quite a turn of fortune.

Or you meant to say you're earning £32k per year - in which case taking the £118k in one go would be ill advised and it would probably be more sensible to take it in several chunks, keeping your total annual income under the higher rate threshold of £50,270, that way you'd pay 20% on all of it instead of 40% on the majority (disregarding the LSA which would be tax free in either scenario).

Marcon

Given that both OP and husband went bankrupt in 2005, it would need to be one hell of a change in fortune!

DRS1

If your wages really are £332k pa why do you need to draw on this pension?  From a tax point of view you'd be better waiting until your income was much reduced.  Perhaps you are thinking that 45% may look like a low tax rate in a few years?

omg29

not 332k  its 32k!

HappyHarry

omg29 said:

not 332k  its 32k!

So 25% (£29,500) tax free
 Approx £18,000 taxed at 20%

 Approx £50,000 taxed at 40%

 Approx £20,500 taxed at 60% due to the loss of the personal allowance.

Are you really, really sure you want to cash this in in one go - that’s an awful lot of tax you will be paying.

cloud_dog

Surely there has to other, better options?

Roger175

What age are you? if not yet 55, you can't cash it in anyway

Exodi

HappyHarry said:

omg29 said:

not 332k  its 32k!

So 25% (£29,500) tax free
 Approx £18,000 taxed at 20%

 Approx £50,000 taxed at 40%

 Approx £20,500 taxed at 60% due to the loss of the personal allowance.

Are you really, really sure you want to cash this in in one go - that’s an awful lot of tax you will be paying.

Just to piggyback off this (very helpful) comment, that means you'd be paying (29500*0)+(18000*0.2)+(50000*0.4)+(20500*0.6) = £35,900 in tax taking it in one go.

Compared to, for example, splitting it into 5 chunks of £23,600 which you could take annually, of which £5,900 would be tax free, and £17,700 would be taxable, but combined with your annual earnings of £32,000 would have you still below the higher rate tax threshold, meaning you would pay tax of 20% on each chunk, which over 5 years would cost you £17,700 in tax.

As you can see above, by taking it on one go, you're paying over double the amount of tax you would if you staggered it over 5 years.

Of course assuming no changes to tax policy or that you have any other income, if so the numbers change slightly but the conclusion is likely to remain largely the same.

Slinky

Did think it was a typo! Most people earning £332K would not refer to it as wages!