Tax on DC Pension

johnboy13

Hi, I'm hoping to move my works DC Pension next Oct and withdraw it as I will be 55 and I'm wondering how much tax I will pay. My total pay is £50,000 so will I get 25% tax free and then pay 40% tax on the rest? I have a normal works Pension, which Im going to take at 60.

HappyHarry

It depends how big it is.

25% can be tax free. The remainder counts as taxable income and is taxed accordingly.

Why do you want to do this? It is not usually an optimal thing to do.

dunstonh

so will I get 25% tax free and then pay 40% tax on the rest

You missed one key detail. The pension fund value.

If your taxable element goes above £100k then you start losing your personal allowance (known as the 60% trap).   you also have a 45% a little further up too.

Plus, accessing the 75% element of the pension means your annual allowance drops to £10,000 which could hinder your future retirement planning.

johnboy13

£60,000, I need the cash for a personal reason.

HappyHarry

Ok, so £15,000 tax free and then you will pay 40% tax on the remaining £45,000, giving you a net of £42,000 and a restriction on your future pension contributions for ever more.

Whilst as a UK taxpayer I should thank you for your generous contribution to the nation's coffers, I can't help but wonder if you might have any other cash-raising methods to explore that don't cost you £18,000 in tax?

Marcon

johnboy13 said:

£60,000, I need the cash for a personal reason.

Looking at your other threads, you seem to have had a bit of a torrid time after becoming ill and being unable to service your loans. However tempting it must be to scoop the pool now, do you really need to withdraw the whole lot in one go and take such a huge tax hit? If you can pay off your debts/meet whatever other personal reasons you have by taking the tax free cash + just 'some' of the rest in the current tax year, that would help reduce your tax bill if you take further nibbles from the pot in future tax years - IF that works for you?

Triumph13

To put numbers on it, assuming that your other pension is going to use up your personal allowance, you are looking at the difference between 40% tax if you take the DC funds now vs 20% if you wait until you retire.  That translates as an extra £9k of tax if you take it early. 

I suppose it might make sense if the interest rates on your loans are very high and you can't refinance.  Or if Big Tony is threatening to break your legs if you don't pay up.

QrizB

I wonder if the OP would be better served by posting a full Statement of Affairs on the Debt Free Wannabe board, and asking for advice over there? They're likely to get a much better outcome by being open with their situation on that board, rather than asking for info in dribs and drabs.

johnboy13

Marcon said:

johnboy13 said:

£60,000, I need the cash for a personal reason.

Looking at your other threads, you seem to have had a bit of a torrid time after becoming ill and being unable to service your loans. However tempting it must be to scoop the pool now, do you really need to withdraw the whole lot in one go and take such a huge tax hit? If you can pay off your debts/meet whatever other personal reasons you have by taking the tax free cash + just 'some' of the rest in the current tax year, that would help reduce your tax bill if you take further nibbles from the pot in future tax years - IF that works for you?

Thanks for your help, appreciated.

johnboy13

Triumph13 said:

To put numbers on it, assuming that your other pension is going to use up your personal allowance, you are looking at the difference between 40% tax if you take the DC funds now vs 20% if you wait until you retire.  That translates as an extra £9k of tax if you take it early. 

I suppose it might make sense if the interest rates on your loans are very high and you can't refinance.  Or if Big Tony is threatening to break your legs if you don't pay up.

Ha ha ha, that made me laugh...

johnboy13

Thank you all for commenting. So if I just take the 20%and leave the rest invested, what happens then if I leave it?