Paying £2880 into pension when retired

11213151718136

Comments

  • Asghar
    Asghar Posts: 433
    Name Dropper First Post First Anniversary
    Forumite
    That's a nice explanation, thanks.
  • bowlhead99 wrote: »
    You can choose to do it either way.

    Traditionally, people would take a tax free "pension commencement lump sum" of 25% at the beginning, and then they would know that all the rest of it (75%) was taxable, and draw that remaining amount, taxable, over time. So in a £100k pot, take £25k out now tax free and then the £75k+ growth will give you ongoing taxable income over your chosen timescale.

    However, the other way to do it is:
    -if you have a big stack of money in your pension account that has not yet been "crystallized" (i.e., you have say £100k in the account and you have never taken a tax free sum or any taxable drawings from it), you are able to partition off just a little bit of it (e.g. £10k) and pull it out right now(£2.5k tax free and £7.5k taxable), and then leave the remaining £90k completely untouched, non-crystallized.

    That remaining £90k is treated as if it is just a smaller pot which has never had any tax free money or taxable drawings taken out of it. It is raw and un-crystallized. It can sit around and grow (maybe back up to £100k, £200k or more)... and in the future you will still have the choice of (a) taking a big 25% lump tax free and leave the rest as taxable income, or (b) again grabbing a chunk out of it and having just that chunk be received as 25% tax free and 75% taxable.


    So on your £3600 if you want £900 taken out of it you have a choice: you could take out £900 up front and later draw down the remaining taxable £2700 ; or take out, say, £900 of which £225 tax free and £675 taxable and the remaining £2700 you can take a decision on later.

    That latter option of just grabbing a chunk of uncrystallized funds and having it 25% taxfree and 75% taxable and leaving all the rest behind un-crystallized, is sometimes known as taking an "Uncrystallized Funds Pension Lump Sum", with a 25/75 split of its taxability. As opposed to taking the traditional 25% tax free pension commencement lump sum at the beginning and then eventually drawing the rest of the 75% all taxable over your chosen timetable.

    Many thanks for the great explanation. I assume that you would have to let your SIPP provider know which way you want to it?
  • moneyfoolish
    moneyfoolish Posts: 681
    First Anniversary Name Dropper First Post
    Forumite
    edited 16 February 2017 at 2:51PM
    jamesd wrote: »
    Yes, but I suggest taking the 25% tax free lump sum from it all then monthly income and making monthly contributions instead. That gives HMRC plenty of time to get the tax code for the income sorted out.

    Also be aware that to you take any of the taxable 75% your annual cap on future contributions falls to £4k. This could hurt those who are still working and could pay in more. This includes taking an Uncrystallised Funds Pension Lump Sum ( UFPLS) because those are automatically 75% taxable.
    If we wanted to do this via HL for my wife with total income of the old state pension, presumably we could put in the £2880 in April, wait until the £720 was added, take out the £720 and then wait for a couple of months until HL had been given her tax code details before drawing out another lump sum of £1880 thus leaving £1000 to satisfy HL rules. We could then put in another £2880 the following April and draw out £3600 after the £720 had been added and follow this sequence until she reaches 75 years of age at which time we can take out the final lump sum including the £1000 less the £25 HL fee for closing the account?
    Alternatively, if we wanted to use my wife's full personal allowance, we could just withdraw the 25% tax free money each year until she reaches 75. At that point she has to stop contributing but can we still withdraw a tax free lump sum each year to keep within her personal allowance until all the money has been withdrawn?
  • AnotherJoe
    AnotherJoe Posts: 19,622
    First Anniversary Name Dropper First Post Photogenic
    Forumite
    If we wanted to do this via HL for my wife with total income of the old state pension, presumably we could put in the £2880 in April, wait until the £720 was added, take out the £720 and then wait for a couple of months until HL had been given her tax code details before drawing out another lump sum of £1880 thus leaving £1000 to satisfy HL rules. We could then put in another £2880 the following April and draw out £3600 after the £720 had been added and follow this sequence until she reaches 75 years of age at which time we can take out the final lump sum including the £1000 less the £25 HL fee for closing the account?
    Alternatively, if we wanted to use my wife's full personal allowance, we could just withdraw the 25% tax free money each year until she reaches 75. At that point she has to stop contributing but can we still withdraw a tax free lump sum each year to keep within her personal allowance until all the money has been withdrawn?

    Yes thats all correct.
  • If we wanted to do this via HL for my wife with total income of the old state pension, presumably we could put in the £2880 in April, wait until the £720 was added, take out the £720 and then wait for a couple of months until HL had been given her tax code details before drawing out another lump sum of £1880 thus leaving £1000 to satisfy HL rules. We could then put in another £2880 the following April and draw out £3600 after the £720 had been added and follow this sequence until she reaches 75 years of age at which time we can take out the final lump sum including the £1000 less the £25 HL fee for closing the account?
    Alternatively, if we wanted to use my wife's full personal allowance, we could just withdraw the 25% tax free money each year until she reaches 75. At that point she has to stop contributing but can we still withdraw a tax free lump sum each year to keep within her personal allowance until all the money has been withdrawn?

    Do you know if HL need tax code details every year or after the first withdrawal only?
  • Snowbelle wrote: »
    Do you know if HL need tax code details every year or after the first withdrawal only?
    I would assume the tax office would send a code each year but I really don't know. Hopefully, somebody else with more knowledge can tell us!
  • Has anybody done this for their OH by setting up a SIPP online? If we go ahead I will have to do it for my wife but she will want to stay as a PAYE non-taxpayer. Can I do all the administration for her online and do I need any information other than her personal details and her NI number?
  • Yes, you can do the administration for your OH and set up the SIPP online, obviously with her consent. Do not wait until April. Set up the SIPP with HL immediately in this tax year 16-17 and deposit £2880 and keep it in cash (do not invest it). There are no charges to keep it in cash. You need to keep a minimum of £1000 in the SIPP to avoid closure charges and keep the SIPP open year after year. HMRC will add £720 after a number of weeks. You could withdraw £1880 before 5/4/17 to make use of this tax years personal allowance leaving the £1000 minimum with the £720 to follow shortly. Then repeat the process next tax year 17-18. You need to use a UFPLS (Unconsolidated Funds Pension Lump Sum) to make a withdrawal and you OH will need to speak to HL to set this up and it takes a couple of weeks to do so you need to be quick to do one this tax year 16-17. Remember 25% of a UFPLS is tax free and the remaining 75% is taxable and your OH will have to claim some tax back after the end of the tax year.
  • Set up the SIPP with HL immediately in this tax year 16-17 and deposit £2880 and keep it in cash (do not invest it).

    Just wondered why you said do not invest it?
  • Yes, you can do the administration for your OH and set up the SIPP online, obviously with her consent. Do not wait until April. Set up the SIPP with HL immediately in this tax year 16-17 and deposit £2880 and keep it in cash (do not invest it). There are no charges to keep it in cash. You need to keep a minimum of £1000 in the SIPP to avoid closure charges and keep the SIPP open year after year. HMRC will add £720 after a number of weeks. You could withdraw £1880 before 5/4/17 to make use of this tax years personal allowance leaving the £1000 minimum with the £720 to follow shortly. Then repeat the process next tax year 17-18. You need to use a UFPLS (Unconsolidated Funds Pension Lump Sum) to make a withdrawal and you OH will need to speak to HL to set this up and it takes a couple of weeks to do so you need to be quick to do one this tax year 16-17. Remember 25% of a UFPLS is tax free and the remaining 75% is taxable and your OH will have to claim some tax back after the end of the tax year.
    We have already switched the maximum marriage allowance from my wife to me which leaves her with a total allowance of £10,900 (£11,000 Personal Allowance - £1,100 transferred to me plus £1,000 Personal Savings Allowance). Her State Pension is approx £7,140 plus she has income interest of approx £1,200 i.e. £8,340 total income. This leave a total tax free amount of approx £2560. I assume that means in addition to the tax free 25% of £3600 i.e. £900 that means she could withdraw another £2560 tax free but anything over that would make her a standard rate taxpayer?
Meet your Ambassadors

Categories

  • All Categories
  • 342.5K Banking & Borrowing
  • 249.9K Reduce Debt & Boost Income
  • 449.4K Spending & Discounts
  • 234.6K Work, Benefits & Business
  • 607.1K Mortgages, Homes & Bills
  • 172.8K Life & Family
  • 247.4K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 15.8K Discuss & Feedback
  • 15.1K Coronavirus Support Boards