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pension fund to buy a house?

caroleukts
caroleukts Posts: 3 Newbie
in Auto-enrolment
I have an old company pension that is worth about £163,000 and I'm currently getting my state pension and living in social housing.


What I would like to do is take the whole sum and buy a house mainly to free up my social housing for a young family who may need it.
But I'm told by my advisor that if I draw the lot (event to pay for a new house) I will have to pay 40% tax on everything over my tax free 25%.


This does not seem fair to me, is there another way to do this? I should mention that my partner is still currently claiming ESA and she is not going to get any better soon.


Thanks' carole

Comments

  • Paul_Herring
    Paul_Herring Posts: 7,481 Forumite
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    You will have to pay tax on that money as if you earned it, since it is - indeed - income (especially since the money going into that fund wasn't taxed to start with.)

    So if you draw it out all in the same tax year, you will end up paying 40% on some of it (i.e. (presuming a normal tax code) anything after £45,000 minus your state pension and any other income)

    You could split it up over different tax years to avoid the 40% tax bracket, but that means you can't draw on it all at once.
    Conjugating the verb 'to be":
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  • dunstonh
    dunstonh Posts: 116,293 Forumite
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    If a board guide or moderator sees this thread, please can they move it to the pensions board as its in the wrong place currently and wont get the same number of people viewing it or responding.....
    What I would like to do is take the whole sum and buy a house mainly to free up my social housing for a young family who may need it.

    Are you prepared to lose nearly half of it in tax?
    Plus, any means-tested benefits being reduced?
    This does not seem fair to me, is there another way to do this?

    It is fair. Pensions are designed to pay an income. That is why the Govt gives them tax advantages (tax relief on the way in and tax free growth). When you draw it, you pay income tax on 75% of it.

    If you draw it conventionally, i.e. a sensible monthly amount (about £540pm in your case) then you will only pay tax at basic rate and only on the amount about your personal allowance.

    You want to draw the lot as a single income payment in one tax year. So, that makes you a higher rate taxpayer as the pension income will be £122,250 in that tax year. You will also lose your personal allowance. So, other income you receive will be taxed higher as well.

    the only other alternative is to draw it over multiple tax years to keep within the basic rate bond. However, this will still damage any means tested benefits.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • badmemory
    badmemory Posts: 7,734 Forumite
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    I just want to stress here that I am not sure of my facts.

    If you are above state pension age & are receiving means tested benefits then "they" can assess you as if you are receiving any other pension provision you may have. This MAY only apply to DB schemes though.


    I would think what you can achieve will depend on how much the property(s) you are looking at actually cost.
  • caroleukts
    caroleukts Posts: 3 Newbie
    Not looking good then, I would have licked to have bought a house or bungalow at about £120K but if that means I will pay tax on my state pension as well as this pension I think I am stuck with it.


    Funny how getting something extra can cause so much grief.
  • xylophone
    xylophone Posts: 44,335 Forumite
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    Are you/your partner receiving means tested benefits?

    If so, have you declared the private pension to DWP?

    https://www.gov.uk/government/publications/pension-freedoms-and-dwp-benefits/pension-freedoms-and-dwp-benefits

    With regard to the State Pension, even if this were the only income, it would be quite possible for it to be high enough for tax to be due.

    This would be the case for a pensioner with GRAD/SERPS/S2P which took him over the Personal Allowance.


    https://www.gov.uk/tax-on-pension/how-your-tax-is-paid
    But I'm told by my advisor that if I draw the lot (event to pay for a new house) I will have to pay 40% tax on everything over my tax free 25%.

    The amount over the PCLS is added to your other income in the year of receipt and taxed accordingly.

    https://adviser.royallondon.com/technical-central/pensions/benefit-options/emergency-tax-and-lump-sum-withdrawals/
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