HM Government - Thieving Farquars

[securespark]

Am considering taking one of my pensions.

New rules say I can take a lump sum of 25% tax-free or take the whole lot and pay tax on it (well, I assume 75% of it anyway).

Surely the money to build that pension was taxed already?

And the Govt. tax it again when you take the pension??

Does anyone know what rate it is taxed at?

 

[EddieM]

Am considering taking one of my pensions.

New rules say I can take a lump sum of 25% tax-free or take the whole lot and pay tax on it (well, I assume 75% of it anyway).

Surely the money to build that pension was taxed already?

And the Govt. tax it again when you take the pension??

Does anyone know what rate it is taxed at?

At the applicable income tax rate I think.

 

[PBC_1966]

Surely the money to build that pension was taxed already?

Yep. But that doesn't stop them from deciding that it's "fair" to tax it again. The same as you paying income tax on earnings, then when you go out to buy something with what's left they demand VAT, or fuel duty, or some other tax.

The most outrageous examples are where they actually charge tax on tax: Import some item on which both duty and VAT are due, and they don't charge the VAT on the price of the item alone, they charge it based on the item plus the duty, so you're not only paying VAT on the item but also VAT on the duty. And the same goes for fuel every time you fill up your car: VAT is charged on the fuel duty as well as the price of the fuel itself.

At least Dick Turpin had the decency to wear a mask and never pretended to be anything but a highway robber.

 

[EFLImpudence]

Your normal weekly pension will be taxed if you also earn enough.

Surely, your lump sum will only be taxed if it, with any other earnings, exceed your allowances.


You need to work it all out.

 

[securespark]

Well, the first 25% is not taxable, and if you take that as a lump sum it is tax-free.

Allowances are exceeded, unfortunately...

 

[JohnD]

Surely the money to build that pension was taxed already?

No, it wasn't.

One of the crucial points about UK pensions was that the money you put in was untaxed, but it was taxable when you took it out.

So if you paid it from taxed income, the pension company received a tax rebate at the standard rate (and if you were a higher rate taxpayer, you would get a rebate when you submitted your tax return). If your employer (even if you had your own company) made the payments, there would be no tax or NI charged, because the money was not part of your earnings.

This arrangement was excessively generous to some people, since they might save (e.g.) income tax + employee NI + employer NI while they were working; and arrange things so that when they retired, they could take 25% tax free, and pay only basic rate on the income they drew. If they were a 40% taxpayer, and their business saved e.g. 12%* employers NI, you can see that the contribution might benefit from 40% tax saved and 12% Eer NI, so "cost" them about £50 for every £100 that went into the fund; and they could draw out £25 tax free, and still have £75 invested to provide an income. You can see that this was money for old rope and the overgenerous allowances have been tightened up, especially for the very rich.

There is still an advantage for some people, that their contributions still save e.g. 40% tax, and, if their income drops on retirement, they might only pay 25% (less allowances) on what they draw out. IIRC the rebate is being reduced to standard rate.

There is also an advantage for people who earn so little that they are not taxpayers, because they are allowed (if they can afford it) to contribute £2880 a year, and a notional tax rebate is paid into the scheme to top it up to £3456*


*figures from memory.

 

[PBC_1966]

Surely the money to build that pension was taxed already?

No, it wasn't.

I stand corrected on that particular point.

 

[WalksWithTurkeys]

As I understand the new tax rules, after the age of 55 you can take a chunk from your pension, with 25% tax free, and the remainder taxed as part of your income. So if you draw £15,000 in one year, and have no other income, then £3,750 is tax free, and the rest is mostly if not all under the yearly tax allowance so you pay little or no tax. Since you got tax back when you paid in, you end up quids in. If you want a big sum after you retire, ISA's may be useful.

Further to JohnD's post, I am sure the higher rate tax rebate still exists but there is talk that it will go. The Tories seem to be changing pensions to the benefit of the lower paid, hence not so good for the wealthy and middle classes. And they removed higher rate mortgage interest tax relief on Buy To Let. Who'd have thought it.

 

[EFLImpudence]

And they removed higher rate mortgage interest tax relief on Buy To Let. Who'd have thought it.

I'm sure that will be more than made up for by the proposal to exclude buy to let mortgage interest from claimable expenses - unless a company or a foreigner - if I understand it correctly.

 

[securespark]

Think I need to see a Financial Advisor!

I have been told I can have 25% tax free now, but you say if that amount is over £3750 I will pay tax.

It doesn't take much, but I'm confused.com!

 

[EFLImpudence]

It depends how you do it:

https://www.moneyadviceservice.org.uk/en/articles/options-for-using-your-pension-pot

 

[JohnD]

the 25% lump sum is tax free. It does not count as taxable income. It is (up to) 25% of the fund value.

Any income you take is taxable, and so is any lump sum exceeding the 25%. You have an allowance on your income before the tax starts. The treatment of income is separate from your tax-free lump sum. https://www.gov.uk/government/uploa..._personal_allowances_and_basic_rate_limit.pdf

For example, on one of my schemes, I was not working and drew 25% of the fund value as tax-free cash, and specified that my pension income was to be 0% of fund value until further notice. So no income, and no income tax. The lump sum was enough to tide me over until things improved. Assuming that I will live to draw income from that fund one day, I will not be able to take another tax-free lump sum, because I have already had it from that scheme. The value of the remaining 75% has continued to grow. If necessary, I can turn the income tap on whenever I want. This is now called flexi-access drawdown (it used to be called income drawdown) because the amount of income you take is at your choice, it is not fixed for life like an annuity. If the fund grows by more than you take, that's great. If you take more than it grows, it will get smaller.

I also have another scheme because I have had pensionable jobs, plus what was a Personal Pension and is now a SIPP, from when I was in business on my own. I will be able to take tax-free 25% lump sums from the other schemes later. If you intend to live for a long time, or have dependents, you should be wary of sucking your schemes dry in case they run out too soon.

Because I have been in occupational schemes, I used to be Contracted Out and will not receive the Flat Rate State Pension, I will get one based on the current State Pension plus a few pence of SERPS. You can get a Pension Forecast that will tell you what you will get. If you have not already got a forecast, and a statement of your NI contributions, apply for them now.

I think WWT is talking about what they call "Take Small Cash Sums" but I have no experience of that.

You may also need to read https://www.moneyadviceservice.org.uk/en/articles/early-retirement-because-of-illness-or-disability

 

[securespark]

Thanks guys, you've been a fantastic help!

I shall go away and do some reading up.

 

[fender]

Useful info thanks..

I'm in the same position where I'm considering cashing in all or part of one as well.