Tax on pension question

[Wacky Racer]

Asking on behalf of my sister:-

She has worked at a few jobs over the last forty years and has three or four small pensions.

At the moment, she is 57 and would like to finish work for good about the end of September this year.

Currently she works a few hours three days a week in the NHS and earns around £500pm.

With one of the pensions (Aviva), she has a pot of £12,000, which as I understand talking to people, if she withdraws the lot (say) to buy a new car, 25% would be exempt from Income tax.

As I understand it, everybody is allowed (around) £10,000 PA before you pay any tax at all

Therefore if she finishes (for good) at the end of September, she will have earned (since April 6th this year) roughly:-

6 months x £500 = £3,000 plus the £9000 pension withdrawal (£12,000 minus £3000 ) total £12,000 in this tax year


So:- £12,000 - the £10,000 tax free allowance = £2000 taxable @ 20% = £400 tax to pay.


a) Are my workings out correct?

b) If they are, When would she have to pay this money? (£400)

Thanks in anticipation

[Simpo Two]

Yes, you can take 25% of a pension tax free (see below).

The income tax allowance for 18/19 is £11,850, so more than you thought.

A pension pot of £12K will get you jack all pension so you may as well take the money. However new cars are a very poor investment, generally losing half the sum invested in 3 years.

I think you will have to pay any tax in the FY you incurred the liability. HMRC's credit isn't as generous as it used to be.

Note: I am not an IFA or an accountant so this info is informal, but it is at least free and probably fairly close to the mark. For professional tax advice ask a decent accountant. For pension advice you can get free info at https://www.pensionsadvisoryservice.org.uk/

[Wacky Racer]

Cheers Simpo for your very useful advice, (as usual)…..I take your point about a new car, I was only using that as an example.

She doesn't need the money especially as they are fairly well off, no debts etc, and the NHS job is just a bit of pin money, as she enjoys it.

Thanks again,

WR.

[Monkeylegend]

Is there a rule that if your pot is no more than £30k you can take it all tax free or have I made that up?

I seem to remember something re this when Georgy boy changed the rules on accessing private pensions pots a couple or so years ago.

[Simpo Two]

Wacky Racer said:

Cheers Simpo for your very useful advice, (as usual)…..I take your point about a new car, I was only using that as an example.

Aha no, if this was Advice it would cost you money; these are merely the ramblings of an unregulated amateur!

[PurpleMoonlight]

The £12,000 will be paid as a Uncrystallised Fund Pension Lump Sum (UFPLS).

25% will be tax free as the Pension Commencement Lump Sum (PCLS).

The balance will be taxed at the point of payment using the emergency tax code, 1185L M1.

She will need to reclaim that tax from HMRC if applicable.

The consequences of the UFPLS is that any further pension contributions will be limited to £4,000 pa.

[PurpleMoonlight]

Monkeylegend said:

Is there a rule that if your pot is no more than £30k you can take it all tax free or have I made that up?

I seem to remember something re this when Georgy boy changed the rules on accessing private pensions pots a couple or so years ago.

You are referring to trivial commutation of defined benefit pensions, and it is taxed.

[Monkeylegend]

PurpleMoonlight said:

Monkeylegend said:

Is there a rule that if your pot is no more than £30k you can take it all tax free or have I made that up?

I seem to remember something re this when Georgy boy changed the rules on accessing private pensions pots a couple or so years ago.

You are referring to trivial commutation of defined benefit pensions, and it is taxed.

I didn't realise I was referring to that

[Wacky Racer]

PurpleMoonlight said:

The £12,000 will be paid as a Uncrystallised Fund Pension Lump Sum (UFPLS).

25% will be tax free as the Pension Commencement Lump Sum (PCLS).

The balance will be taxed at the point of payment using the emergency tax code, 1185L M1.

She will need to reclaim that tax from HMRC if applicable.

The consequences of the UFPLS is that any further pension contributions will be limited to £4,000 pa.

OK, Thank you, and thanks to everybody else who has replied.

Update:-

My sister has been sent an information pack from her pension provider "Aviva", under this "crystalised" system.

The fund stands at £11,850, which (apparently) she is entitled to withdraw as she is 57.

As stated earlier, she DEFINITELY plans to finish work at the end of September this year, she currently works a few hours in the NHS, earning £500pm, which is not taxed, so by the time she retires she will have earned around £3,000 since April 6th, that is 6 months x £500.

So:- Anyone know how much she will actually get a cheque for, bearing in mind there will be some "emergency tax" withheld, and how quickly will she be able to get this tax repaid by HMRC, as her total taxable "earnings" for 2018-19 will be, (bearing in mind 25% of the pension fund is not subject to tax)

75% of her fund plus £3000 earnings from the NHS.

Obviously she will have her yearly £11800 "allowance" that everybody is entitled to.

Hope this is clear, it seems very complicated to me

Thanks in anticipation.

WR.

Edited by Wacky Racer on Tuesday 12th June 19:21

[dingg]

for ease of calculation assume the fund will be worth 12k when she retires

take the 3k as her 25% tax free allowance

take £5800 of the remainder to take her up to her allowance of £11800

take the other £2200 next tax year , no tax paid at all that way (I think)

[Wacky Racer]

dingg said:

for ease of calculation assume the fund will be worth 12k when she retires

take the 3k as her 25% tax free allowance

take £5800 of the remainder to take her up to her allowance of £11800

take the other £2200 next tax year , no tax paid at all that way (I think)

Cheers,

Yes, that's probably the most tax efficient way of doing it, but if she decided to take the lot now, I don't think she would pay much tax anyway, as she has such low earnings...maybe a couple of hundred or so?

This is what I would like to find out.

[leef44]

Wacky Racer said:

dingg said:

for ease of calculation assume the fund will be worth 12k when she retires

take the 3k as her 25% tax free allowance

take £5800 of the remainder to take her up to her allowance of £11800

take the other £2200 next tax year , no tax paid at all that way (I think)

Cheers,

Yes, that's probably the most tax efficient way of doing it, but if she decided to take the lot now, I don't think she would pay much tax anyway, as she has such low earnings...maybe a couple of hundred or so?

This is what I would like to find out.

As mentioned by an earlier poster that she will pay tax then have to claim it back afterwards. The tax she pays is based on the timing. So say end of September is roughly half way through the tax year. This would mean HMRC bases her income earned against an allowance of 6/12 x 11800 (£5900).

I don't know if her £3000 from NHS goes into the calculation pot (it probably does). So by end of September she would have £12000 taxable earnings (£3000 from NHS plus £9000 not tax free from pension)

£12000 earnings to date
-£5900 less personal allowance to date
=£6100 income to tax at 20%.
She pays £1220 tax now.
After the end of the tax year, she does self assessment form and claims back overpaid tax.
£12000 - £11800 = £200. £200 x 20% tax = £40 tax.
Overpayment of £1180 refunded.

I think there is a certain form you can get from HMRC and you fill it in before you get the pension and then HMRC doesn't "overtax" you so much so that you don't have to claim back so much or any over payment of tax afterwards. This is for those who want the cash-flow advantage.