If RR is putting up income tax later this month, would it be wise to extract taxable pension?

MikMikandThriceMik

If RR is putting up income tax this month and I rely on the 75% taxable part of the pension, having already extracted the 25% tax free lump sum...... 
Would it be a wise thing to extract a good few thousand from my pension at 20% tax rate and put it into some sort of savings(which I know the interest will be taxed), or just leave it in my pension pot and then be hammered by the extra income tax when extacting the little by little from my private pension at the newer higher income tax rate?

I am thinking of extracting £24000 Gross.

My private pension is cash only investments becuase I am so scared to invest in anything riskier, and it only pays a little more than 2% interest.

Thank you.

SVaz

If your retirement is going to be 20+ years then having all your pension in cash is the riskiest thing you can possibly do.
If you are drawing down income,  only getting 2% interest and inflation is running at over 3%,  you are losing money every single year and your pension isn’t sustainable. 

Why pay £4800 in tax on a £24k withdrawal, assuming that stays within the BR limit ( in fact you’ll be paying 40% and then have to claim some back)  to save a potential £200 a year on every £10k drawn.   That’s nuts.  

NorthYorkie

The income tax rate is fixed for a complete tax year so any increase will only apply from 6 April next year.

Dazed_and_C0nfused

NorthYorkie said:

The income tax rate is fixed for a complete tax year so any increase will only apply from 6 April next year.

I suspect someone once said that about Capital Gains Tax 😳

Albermarle

MikMikandThriceMik said:

If RR is putting up income tax this month and I rely on the 75% taxable part of the pension, having already extracted the 25% tax free lump sum...... 
Would it be a wise thing to extract a good few thousand from my pension at 20% tax rate and put it into some sort of savings(which I know the interest will be taxed), or just leave it in my pension pot and then be hammered by the extra income tax when extacting the little by little from my private pension at the newer higher income tax rate?

I am thinking of extracting £24000 Gross.

My private pension is cash only investments becuase I am so scared to invest in anything riskier, and it only pays a little more than 2% interest.

Thank you.

In the long run, this will cost you a lot more than any increase in income tax ever will.

Grumpy_chap

A change of income tax mid-year would be most exceptional and extremely challenging to implement - as a minimum one imagines it would require everyone to complete two tax returns for the year and I doubt there is the administrative capacity to support that (within HMRC) as it would not be an obvious solution within current system coding.

For the OP, IF they withdraw £24k from their pension, do they need that fund this year?  If not, have they maxed out their ISA allowances?

The comment around cash investments at a rate of 2% for low risk seems to be a high-risk decision of itself (cash investment) and the rate mentioned seems particularly low if the pension fund is of any meaningful size.
Pension fund in cash was briefly referenced in this recent thread:
https://forums.moneysavingexpert.com/discussion/comment/81724330

SVaz

Even a Short term money market fund would just about keep up with inflation ( at the moment). 
I can’t get my head around someone thinking 100% cash is the way to go for an entire pension.
If it’s only going to last for a few years then fair enough.
I’ve got 5 years income ready for 2028 and I wonder if it’s the right balance!  

Gilt ladder / fixed term annuity / something/anything has to be a better ‘plan’ than 2% interest.  

Aretnap

Dazed_and_C0nfused said:

NorthYorkie said:

The income tax rate is fixed for a complete tax year so any increase will only apply from 6 April next year.

I suspect someone once said that about Capital Gains Tax 😳

CGT is a very different proposition to income tax. There are people sitting on hundreds of thousands or millions in unrealised capital gains, who could save a lot of tax if they sold their assets before a rise in CGT came into force.

With income tax though, for the vast majority of people there's no advantage in withdrawing huge amounts of money from your pension to avoid next year's tax increase, as you'll just push yourself into a higher tax band for this year. You might save yourself a few tens of pounds by taking a few thousand out of your pension sooner than you were planning to - but you can't save yourself thousands of pounds if you withdraw hundreds of thousands.

Similarly there'd be no advantage to asking your employer to pay you five years salary in advance to avoid a basic rate of 22% rather than 20% next year - even in the unlikely event that your employer was willing to do it. 

So there's a natural limit to how much income tax can be avoided by bringing income forwards from next April until now. Which means there's no great advantage to implementing a change immediately. And as a mid-year change in the rate would be horrendously complex, and therefore probably costly, to implement, I can't imagine any reason why the government would want or need to do it.

Aretnap

MikMikandThriceMik said:

I am thinking of extracting £24000 Gross.

My private pension is cash only investments becuase I am so scared to invest in anything riskier, and it only pays a little more than 2% interest.

To put that into perspective, if income tax went up by 1%, withdrawing it before the rise came into effect would save you £240. If the worst case forecasts were correct and it went up by 2%, you'd be taking about a difference of £480.

Obviously having £240 is better than not having it, but if that's enough to panic you or make a serious dent in your retirement plans than you probably need to rethink them. You are losing a lot more than that every year by keeping your pension in a fund that pays less than a half-decent savings account.

As above income tax is levied on your total income for the tax year from April to April, so you will have plenty of time to make an informed decision after you know what is actually going to happen, before any change in the tax rate comes into effect.

zagfles

Dazed_and_C0nfused said:

NorthYorkie said:

The income tax rate is fixed for a complete tax year so any increase will only apply from 6 April next year.

I suspect someone once said that about Capital Gains Tax 😳

CGT is different, it would be brain dead to announce an increase in CGT in advance as it'd just result in everyone crystallising years or decades of gains before the increase. Income tax is completely different as the vast majority of income isn't flexible, some is eg drawdown and sal sac, but even there there is limited benefit if rates were to change. It would also be ridiculously complicated to have 2 income tax rates in one tax year. 

Cobbler_tone

Treasury ‘insiders’ suggest the raid on the TFLS has been shelved. The 2p up/2p down seems a consistent theme, unless you pay 40% tax and NI will still apply.
Lead article from the Telegraph. Doctors and Teachers not happy. 
If that transpires I could consider a bigger TFLS but would wait for the brains to crunch the numbers. Probably hold fire to see what the subsequent chancellor reverses.