New Pension Rules

[interele]

This is the scenario

Job income £30
Pension fund £100000

If I took the whole lot as cash on my 55th birthday and kept working

1. Job income would be taxed the same
2. I would lose my £10k tax allowance
3 I would get the first £25000 tax free on the pension fund
4 I would pay basic rate tax on the next £10000 or so
5 I would pay 40% on the rest

Is this basically correct ? - I would get proper advice
when the time came but it this generally right

Ta

M

[ubasses]

Doesn't look like it.

Why would you lose your tax allowance. Everyone gets £10500 fro 6 April 2015. You would get your 25k tax free from pension why not take an income from the other £75k or spread it over 3 years to keep yourself in the basic rate tax band. You do not say how often you get the £30 is it a day, week month, year?

[interele]

Sorry - typo £30k per year

I thought the tax allowance was reduced once your income in a given year exceeds £40k

[fiction-factory]

The removal of the £10K personal allowance is phased in once income exceeds £100000. The personal allowance reduces where the individual’s income is above this limit by £1 for every £2 above the limit.
Under your scenario the £100K figure would be breached so your allowance would be reduced. I'm not sure whether you'd lose just some of it or all of it. If the 25% tax free bit doesn't count then you'll keep some allowance.

One more thing though- are you sure it's the sort of pension where you can take it all as a lump sum? If it's a public sector or company scheme I don't think you can.

[interele]

It's a private pension. The only reason I'm considering cashing it in is that I now work for a local authority - the pay is rubbish but the pension is spectacular

[ubasses]

Ok that would change my answer completely, you will need some independent advice.

[New Judge]

If you just consider your earnings of £30k and take none of your pension pot you will see deductions of £3,880 income tax and £2,632 National Insurance, a total of £6,512 .

Looking now at the pension pot, you can take your £25k tax free leaving you with £75k to worry about. If you took all of it and had it taxed as earnings in a single year you would have a taxable income of £105k for the year. Your personal tax free allowance will reduce by £2,500 to £8,100 (it reduces by £1 for every £2 you earn over £100k). You will therefore pay tax on £96,900. You will pay 20% on this income between £8,100 and £39,885 which is £6,357. You will pay 40% on the remaining £65,115 which is £26,046. So your total tax bill will be £32,403. However there is also National Insurance to consider. The NI threshold kicks in at £8,060. You pay 12% between this lower threshold and £42,380 which is £4,118. You then pay 2% on your remaining £62,620 which is £1,252 making your total NI bill £5,370. So your total deductions for the year will be £37,773.

In taking the extra £75k you will see additional deductions of £31,261 (41%). This means you will be left with just £43,739.

To minimise this extra tax burden you need to keep the amount you draw to below the higher rate income tax threshold. For next financial year this is £42,385, meaning you can take £12k or so. You would then lose “only” 32% of any amount you draw (20% income tax and 12% National Insurance).

[BRIGHT SPARK]

My provider told me that the 75% will be taxed at 45% initially and adjusted accordingly at the end of the tax year.The tax man will be rubbing his hands in April.

[fiction-factory]

My only query on New Judge's comprehensive answer is that I'm not sure NI would be levied on the money withdrawn from the pension pot.

[New Judge]

Actually, now I think about it, neither am I f-f. I'll make some enquiries.

[New Judge]

Yes you’re quite right, f-f. No NI is payable on pension pot withdrawals.

This reduces interele’s additional deductions by near enough £3,100, making them £28,161 in total, or 37.5% of the £75k. Of course this does not alter the amount he needs to consider taking to minimise his tax deductions.