Pension money ............ and income tax

[Tilt]

Hopefully a fairly straightforward question.

 

Using the simple fact that a person can take 25% of their private pension Tax Free and would then (normally at least) pay income tax on the rest .........

 

(am I correct in thinking it is income tax ?????)

 

And then if it is, does paying tax on the rest of the money (75%) depend on ones income within the tax year that this other money is taken.

 

ie, if I took another 25% lump sum with NO OTHER income in that tax year and this 25% was under my tax code limit, would I still end up paying tax on it ??????

 

Hope that makes sense. Thanks.

 

 

[Tilt]

Found the info I need .......... thanks guys.

[Ootohere]

@Tiltjust out of interest could you share what you found out.  What does the tax get paid on?

 

OT but my mum is 98 years old today and this week was moaning about the cost of living and rent, council tax etc etc.

Without discussing her private pension and other income i pointed out that she gets £180 a week Government Pension and last year they gifted an extra £1,320 in additional cost of living / energy / winter payments, and this year it will be at least £900 additional help. 

Not bad when you are never going out your door and others wait on you hand and foot. 

Edited 24 March, 2023 by toot

[Tilt]

@toot

Looking at various sites including a Gov site, it is taxed as income tax ........https://www.gov.uk/tax-on-pension

 

So yes, as far as I can tell it is possible to withdraw a private pension without paying any tax on it, so long as your total annual income does not exceed your tax allowance. in any given year of withdrawal.

 

There are others that can actually get a higher tax free allowance depending on pension type and / or circumstances.

 

 

[Tilt]

I'm still a little confused though and need to look into this a little more.

 

Seems the two options that I am interested in (ie 25% tax free lump sum and leave the rest for however long?) are pretty much identical ......

 

ie, comparing one option to the other option, all of the pros / cons and options are identical. I cannot see the point of offering two options that have the same outcome.

 

Pensions eh ...........  who needs em, Lol ..........

[Norton Ian]

The way I understand it is that if you don't take the 25% as a lump sum, then each time you take some out 25% of that is tax free. This is assuming that you are leaving it as a pot of money and drawing down some as you need it. If you're buying an annuity I'm not sure, but annuity rates are criminally low. 

 

If you have a decent sized pot it's really worth paying for some financial advice as pensions are complex and you only usually get one bite of the cherry.

[lol-lol]

I am trying to make head and tail of all this as not to fall foul of the rules and the ones that get me worried are Pension Recycling and TAA, Tapered Annual Allowance and all their complexities.

 

One good thing is the actual guidance to HMRC Revenue Officers is available to the public under the Freedom of information as this does not fall under restricted information, like some of the other HMRC "guidance" I deal with on the customs side of the HMRC website Guidance for Officers.

 

So here is the HMRC internal, now external as well, Pension Manual ........ https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual 

 

With the Budget 2023 amendments, not all updated into UK government documentation it appears, lots of people will be, as encouraged, to go back in to work having already partially or fully retired.  Also people asking for redundancy and preparing to retire, taking pension lump sums and therefore having to do something with the other 75%, annuity or put in a drawdown account, tax around taxation of pension and PAYE is super complex.  Made extra complex by many hundreds of thousands of public workers now and still retiring at 60 years old but also still working as they moved to the private sector and also the government's freezing of the tax allowances ie £12.5k is not really enough to live on with today's energy and food price rises and even £50k is not exactly a king's ransom considering the cost of everything.

    

Inflation may fall to less than 5% by the end of the year but it still means that the compounding of inflation over the last couple of years has been closer to 20% but wages and benefits not even close to that for most people. 

 

[D15VRS]

Your partner is also allowed to earn £12.500 py, if she works and does not earn this amount, she can give you roughly £1000 of her Tax Allowance, ie you now get £13.500 ish to earn before Tax. 

[KeithCheetham]

On 26/03/2023 at 15:17, Tilt said:

 

Seems the two options that I am interested in (ie 25% tax free lump sum and leave the rest for however long?) are pretty much identical ......

 

 Unsure if I am reading this right but not sure that you can take 25% tax free without doing anything else with the pot - starting a drawdown, buying an annuity  etc. Your pension provider should advise what options are available for your pot. My personal understanding is drawdown - if you take £12600 which would be your tax free allowance PA dependant on tax code, you could also take another 1/3 (£4200) that would be a 25% tax free allowance out of your pot so your total income without tax would be £16800 per year. The advantage of this is what you leave in the pot, if invested in shares etc could go up in value - or fall - of which your remaining 25% tax free portion may go up - or down. There are a few financial advisers with informational videos on YouTube but take professional advise as bad info can cost you dearly and once you commit I do not think you can back-track and change to another method.

[lol-lol]

4 hours ago, KeithCheetham said:

 Unsure if I am reading this right but not sure that you can take 25% tax free without doing anything else with the pot - starting a drawdown, buying an annuity  etc. Your pension provider should advise what options are available for your pot. My personal understanding is drawdown - if you take £12600 which would be your tax free allowance PA dependant on tax code, you could also take another 1/3 (£4200) that would be a 25% tax free allowance out of your pot so your total income without tax would be £16800 per year. The advantage of this is what you leave in the pot, if invested in shares etc could go up in value - or fall - of which your remaining 25% tax free portion may go up - or down. There are a few financial advisers with informational videos on YouTube but take professional advise as bad info can cost you dearly and once you commit I do not think you can back-track and change to another method.

 

I thought I recently read that upon taking ones tax free lump sum one had to crystallise the 75% within 6 months which to the unsure was logically put it in to a drawdown account rather than buy an annuity where like now the annuity rates, oft translates to the provider putting the money into a profile of uk Gilts of various durations depending on the various yield curves at that time.

 

Trick is, as I see it, to take lump sum in second half of tax year if one has worked part of the tax year, live of the lump sum for the remainder of the tax year so the annuity or drawdown starts in a new tax year and one gets the first £12.57k  tax free if one is still under pension age. That sounds like optimum tax efficiency to me and one should get a good rebate for being heavily taxed in the first part of the year but earning little or nothing in the second part of year but have to wait for self assessment time of course which more and more are getting dragged in to as allowances are so low in real terms in this time of rampant inflation.

 

[VWD]

On 28/03/2023 at 20:27, D15VRS said:

Your partner is also allowed to earn £12.500 py, if she works and does not earn this amount, she can give you roughly £1000 of her Tax Allowance, ie you now get £13.500 ish to earn before Tax. 

Worth remembering about. She's got to make the call and request it. Other thing to look at is if you can get payments mad eto wife after a few years. She's still got a low tax allowance and small payments might take you out of tax.

However UK benefits system rewards you if you don't, if you're eligible. Bloke gets Council tax benefits etc and these ( including Pension Credit) all take account of this. HMRC TAKE TAX, you benefit. But at end of year you get rebate from HMRC.

Another thing forgotten about is "Carers Allowance" , if you get some sort of disability allowance. You & she won't get any cash, but an allowance as she cant get help ( on State pension) , but it gets money knocked off Council tax bill .