Pensions

[Dahlia_Lama]

Pensions brought me here.

I have googled and googled until i'm blue in the face !

My husband reaches a grand old age soon (55) and part of this means he has to address his personal pension.

He has been fairly astute to his credit and has a fair sum to play with , if only the tax man hadn't gotten into the equation !

He has opted to only withdraw the tax free amount at the moment.He still works.

My problem is, he seems to have to get the remainder 'dripfed' over several years.

Given he has already paid tax on the money he invested, why does he have to pay 40% tax to release the rest now?

Please tell me i'm not alone in being confused with this! Thank you if you can settle my currently overworked mind .

[jennyjoan]

I can't give you a definite answer cos I am retired about 10 years now but unbeknownst to me as a kid I had paid into "some kind of system". I allegedly owed 40% to them tax but I chose to ignore (went into denial) - they caught up with me 3 years later and I had to pay. I just thought 40% was a disgrace maybe 20% but not 40% nearly half the bloody payment.

[bhg481]

During your working life any income you have which is paid into a pension pot is not taxed. When you come to draw the pension it counts as income and is then taxed. If the investments he made whilst working were not paid into a specific pension fund they would not have been eligible for tax relief.

[Dogsbody2]

He does not "have to" do anything with it. If he is still working, he can choose to just leave the pension sum to grow bigger. Most decent ones are growing by at least five per cent when inflation is less.
bhg has correctly covered the first point.
Frankly, unless you need the money now, I'd defer pay out until his earnings from other sources fall back to a point where no higher rate income tax is payable.
Alternatively consider paying into another pension scheme, on which he'd get tax relief, to draw out later as above. He'd be able to get 25% out later tax free too, unless legislation changes.
I don't understand what the first reply is trying to say, it seems irrelevant.
None of the above constitutes financial advice, which I am not allowed to give.

[EDDIE51]

As said you do NOT pay tax on earnings that are paid into your pension !
Unless you really need the 25% leave it in the scheme where it will gain interest until you do need it.

[VHG]

>>Given he has already paid tax on the money he invested,

As has been said, no it is not.

Money in to a pension is tax free.

[Peter Pedant]

Ha ! got one !

a ref to show you were not taxed on conts in the UK
http://ec.europa.eu/taxation_customs/taxation/personal_tax/pensions/index_en.htm

Full marks for looking at your hubby's pension and the tax implications

He contributed as we all did into an EET pension system
Exempt at contribution, exempt at maintainance and taxed at disbursal

Actually the gt pensions robbery wh killed final salary pensions was Brown's tax grab of 1997 which taxed some part of the maintainance system ( corpo tax in pension firms ) so the UK system amidst loud squawking became E,E(T),T and the consequence was - Good bye final salary pensions

and yes he should get dripfed a pension over the next few years
so you have got it right

it is just you dont like what you see
[ like you know no tax ever - well yeah in your dreams ... ]

[Peter Pedant]

dogz and bhg know what they are talking about on previous outings

[fiction-factory]

The answers above about highest rate tax relief being given at source on pension contributions are of course all correct.
On another point: who has said he has to pay 40% tax on the drip fed amounts? Will his total income in future years put him in the 40% tax bracket. If not then it's possible each one off payment may be taxed at 40% initially as the taxman doesn't know he won't get it every month, but he can claim it back in time if he is only a basic rate tax payer

[fiction-factory]

Or are you saying the 40% tax applies only when he takes the whole lot out now rather than when he gets it drip fed? If so, it will be taxed at the appropriate marginal rate which could well be 40% if he has a fair sum

[Dogsbody2]

I suspect the issue may be that he is trying to take ALL the 25% tax free now, and leave the 75% invested to drawdown later. I don't think you can do that.
As you drawdown amounts within a particular tax year, 25% of it comes out non-taxable, the rest is taxed as his marginal rate - 40% in his case because of other earnings.
My suggestions as above stand.

[Dahlia_Lama]

Thank you all for claryfing this for me. So he hasn't been double taxed, that's a relief.
He is withdrawing the 25% tax free now which leaves 75%. I was under the misapprehension that after a few years the amount of tax he would pay would reduce. Wrong !!

Apparently 40% is the across the board tax anyone would pay regardless of their current income.Scandalous!

The remainder of the pension pot will make more money left alone at the moment.

Thank you all for your help in making this a lot clearer to me, it is a fair amount and it worries me that we are not making the right decisions.
I feel much better now I have a handle on it.

[fiction-factory]

>Apparently 40% is the across the board tax anyone would pay regardless of their current income.Scandalous!

Wrong.

Tax may initially be deducted at 40% but if he is not a higher rate tax payer (or any tax payer) he should get the overpayment back.

There are lots of explanations online

[fiction-factory]

Justa warning- he may find it's 45% or more initially

[fiction-factory]

Here's a fairly old article which explains it. I'm sure there are more recent ones too.
http://www.telegraph.co.uk/finance/personalfinance/pensions/11181454/Savers-who-cash-in-pensions-clobbered-with-45-per-cent-tax.html

"HMRC has insisted the impact would not be widespread and would only apply if savers could not supply their tax code."

[Dahlia_Lama]

Ah, thank you for that explanation fiction-factory. I have to say that was one of the main things which was puzzling me.
Either way though, it's an excessive amount of tax to pay. Would have been better if it had been taxed originally.
It's not much of an incentive to plan for your later years when you're penalised for doing so.

[fiction-factory]

Have you read the article?
Unless it's a huge pension he will not end up pay 40% tax on it. He will get a chunk of it tax free each year unless he has other income and will pay basic rate tax on the rest, unless his total income exceeds the threshold for 40% tax

[Dahlia_Lama]

I've just read the article, I didn't see your link until I had posted.

It's an excellent link and it makes sense to me. I'm glad i'm not alone in being confused by it all. It was the tax issue which put a spanner in the works, for a lot of people it would seem.

Your help has been very much appreciated.