Cashing in one of my pension pots

mailmannz

Team,

I have two pension pots, an old one I no longer contribute in and my "normal" current pension pot that I am paying in to at the moment.

The smaller of the two I plan on taking the 25% lump sum at the start of March next year when I turn 55 and then looking to draw down the balance of that towards the end of March before the start of the new tax year.

The questions are;

1. Is the 25% tax free sum counted as income for tax year 2024-5? So added to my current income which would push me close to the higher income tax band.

2. I then want to draw down on the balance of that pension in the last week of March. The question here is does that atomically mean I'm in the higher tax bracket for 2026-27 (which I wouldn't be in normally if I hadn't drawn down on this pension pot)?

I have a couple of reasons for this, mainly to use that smaller pot for the child's university fees and living allowance and help my mother in her final years. This doesn't really affect my actual retirement because my main pension pot that I (and my employer) contribute to is pretty healthy.

I also want to pull the money out of this pot in case Labour decides to change the rules in April. Don't really care about the higher tax charge...I just want this money out of their reach and somewhere I can be using it to help my family.

FIREDreamer

mailmannz said:

Team,

I have two pension pots, an old one I no longer contribute in and my "normal" current pension pot that I am paying in to at the moment.

The smaller of the two I plan on taking the 25% lump sum at the start of March next year when I turn 55 and then looking to draw down the balance of that towards the end of March before the start of the new tax year.

The questions are;

1. Is the 25% tax free sum counted as income for tax year 2024-5? So added to my current income which would push me close to the higher income tax band.

2. I then want to draw down on the balance of that pension in the last week of March. The question here is does that atomically mean I'm in the higher tax bracket for 2026-27 (which I wouldn't be in normally if I hadn't drawn down on this pension pot)?

I have a couple of reasons for this, mainly to use that smaller pot for the child's university fees and living allowance and help my mother in her final years. This doesn't really affect my actual retirement because my main pension pot that I (and my employer) contribute to is pretty healthy.

I also want to pull the money out of this pot in case Labour decides to change the rules in April. Don't really care about the higher tax charge...I just want this money out of their reach and somewhere I can be using it to help my family.

Is MPAA of £10,000 likely to be a problem for you as this will apply if you take taxable monies out of any defined contribution pension (small pots method excepted)?

Marcon

mailmannz said:

The questions are;

1. Is the 25% tax free sum counted as income for tax year 2024-5? So added to my current income which would push me close to the higher income tax band.

Tax free is just that: tax free. It isn't added to your current income for tax purposes (but - more for the benefit of others reading this thread than you) could count for other purposes such as means-tested benefit claims).

dunstonh

The smaller of the two I plan on taking the 25% lump sum at the start of March next year when I turn 55 and then looking to draw down the balance of that towards the end of March before the start of the new tax year.

Wouldnt it be simpler to just to the transaction in one go.   At least you will have time to do the tax reclaim, which you may not have if you wait until March.

1. Is the 25% tax free sum counted as income for tax year 2024-5? So added to my current income which would push me close to the higher income tax band.

Tax free cash is not included in the income tax bands.  The 75% you draw is though.

2. I then want to draw down on the balance of that pension in the last week of March. The question here is does that atomically mean I'm in the higher tax bracket for 2026-27 (which I wouldn't be in normally if I hadn't drawn down on this pension pot)?

If you draw the 75% in 25/26 then it will have no impact in 26/27.

This doesn't really affect my actual retirement because my main pension pot that I (and my employer) contribute to is pretty healthy.

Although you will have to report to the remaining pension provider (and any you have in the future) that you have triggered the MPAA which may hurt you in respect of future contributions.

I also want to pull the money out of this pot in case Labour decides to change the rules in April. Don't really care about the higher tax charge...I just want this money out of their reach and somewhere I can be using it to help my family.

That is a rubbish reason.  i.e., you want to pay a higher tax charge in case Labour introduces tax.

mailmannz

Dunstonh,

yeah it is a rubbish reason but still a reason! Humans eh! Go figure!! 😊

Thanks for your feedback. 

mailmannz

FIREDreamer,

the 10k limit won’t be a problem as my current contribution is less than this yearly already.

thanks for the reply though! Really useful info!! 

AlanP_2

I also want to pull the money out of this pot in case Labour decides to change the rules in April. Don't really care about the higher tax charge...I just want this money out of their reach and somewhere I can be using it to help my family.

If a change is made from April then it needs to be announced in November's budget so why not wait and see? 

Spreading the taxable withdrawal across more than 1 tax year would make sense wouldn't it, particularly as you are planning on March to do it anyway 

ali_bear

If you really want to help your family you could start by having a decent pension, and not spending all the money now. That way you won't be so dependent on them when you're older.