I have a small company pension worth around £9,000. I’m 61 and due to retire at the end of March.
Today I called my pensions firm who advised me if I increased my pension to £10,000 I would be able to take £2,500 for the next four years and it would all be tax free because it falls on different tax years.
I then spoke to Pension Wise who informed me that this information was not correct and that only the first 25 percent are tax exempt. Could you advise me please.
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Retirement money: How will a work pension pot worth £9,000 be taxed when I retire as I am being given confused advice on this?
Steve Webb replied: I can understand why you were confused by the seemingly contradictory information given to you. I hope I can clarify what is going on.
As Pension Wise told you, once you’re over 55, the basic idea is that a quarter of your pension pot can be withdrawn tax-free, and the rest counts towards your income taxable in the year you take it.
This means that if you wanted to take a pension pot of £10,000 all at once, you would receive £2,500 tax free, and the remaining £7,500 would be considered taxable income that year.
However, the actual amount of tax you would pay would depend on your other income in the same year.
For example, you mention that you are currently working. If you withdrew the entire pension pot this year, the £7,500 would be added to your salary and you could easily end up paying tax on the full amount.
However, your provider suggests you do something different.
Instead of taking the money all at once, you’d wait until you were retired and then withdraw “chunks,” with each chunk being 25% tax-free and 75% potentially taxable.
As you had retired (so you had no taxable salary) and had not reached statutory retirement age (so you had no taxable state pension), then the 75% would be well within your tax free. personal allowance.
So, although this part of your withdrawal is included in your taxable income, you would in fact not pay any tax as it would be entirely covered by your personal allowance.
There are, however, a few other things to think about.
The first is to think about what you will really live on if you stopped working and did not start receiving a state pension.
It seems unlikely that you will be able to live on a pension pot of £10,000 spread over four years.
If you have other income (such as a work pension or rental property income), this could eat up your personal allowance for the year and mean that your private pension brackets would take you above the non-allowance. taxable and be taxed after all.
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> Did you lose the state pension if you were a widow on retirement?
The second interesting thing is that your provider has suggested that you increase your pension up to £10,000.
Leaving aside if they sailed a bit close to giving you financial advice, I was initially surprised that they tied the possibility of taking a pension in installments to the amount you had in the pot.
However, I checked your provider’s website and they say the minimum pot size you need to have before you can pension in ‘flex chunks’ is £10,000, and that’s why they told you suggested to reload before you can go down this road.
One last handy thing to know is that the first time you make a withdrawal, HMRC may ask your supplier to deduct the tax using an “emergency” tax code.
HMRC does this because they believe you can make many withdrawals which would clearly put you above the tax threshold. But if you only plan to make one withdrawal per year, you can fill out a form and reclaim the tax from HMRC.
You should also be aware that once you start withdrawing taxable money from a pot worth £10,000 or more, you trigger a tighter limit on the tax relief you can get on any future retirement savings.
If you don’t plan on saving more for retirement in the future, that shouldn’t bother you, but if there’s a chance you’ll go back to work and contribute to a pension again, you should be aware of it.
I wrote more about this “annual silver purchase allowance” here.
Ask Steve Webb a question about retirement
Former Pensions Minister Steve Webb is This Is Money’s Agony’s uncle.
He’s ready to answer your questions, whether you’re still saving, quitting work, or juggling your finances in retirement.
Steve left the Department for Work and Pensions after the May 2015 election. He is now a partner in actuary and consultancy firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at email@example.com.
Steve will do his best to respond to your message in an upcoming column, but he won’t be able to respond to everyone or correspond privately with readers. Nothing in his answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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If Steve is unable to answer your question, you can also contact MoneyHelper, a government-backed organization that offers free pension assistance to the public. He can be found here and his number is 0800 011 3797.
SteveWe get a lot of questions about state pension forecasts and about COPE – contracted pension equivalent. If you write to Steve on this subject, he answers a typical question from a reader here. It includes links to several of Steve’s previous columns on state pension forecasts and contracting out, which might be helpful.
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