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Where Taxpayers and Advisers Meet

please help me before I cash my pension

xazy
Posts:3
Joined:Tue Jan 23, 2018 1:49 am
please help me before I cash my pension

Postby xazy » Sun Jul 04, 2021 5:25 pm

I appreciate your answers
I am 69 years old self employed on £25,000 a year with £580.00 state pension a month. I have £38,000 private pension and I want to buy new car worth £32,000.
They told me if I cash it in full they will give me £32,000 (first 25% is free and 75% is taxable at 20%).
My question is , If I cash my pension, do I have to inform HMRC and are they likely to tax it again just like they are taxing my state pension at the moment. What about if I only take the free lump sum of £9500.
Thank you in advance

ben_power
Posts:62
Joined:Tue Feb 27, 2018 8:34 pm

Re: please help me before I cash my pension

Postby ben_power » Mon Jul 05, 2021 12:29 am

If you have earned income of £25,000 and the State pension of £580 per month (this is normally paid every 4 weeks) so should provide an annual income of £7,540 your total income is currently £32,540.

Your personal pension will allow you 25% tax free (£38,000/4 = £9,500) and the other 75% will be taxed at your marginal rate. In your case the additional £28,500 will push you into the higher rate tax threshold (40%) as your total annual income will be £32,540 + £28,500 = £61,040. Not all of the £28,500 will be taxed at 40% but approximately £10,000 will be and the rest will be at 20%.

If you use flexi access drawdown you can take funds from the pension in stages. For example, you could just take the tax free cash and leave the rest in the pension, or you could take the tax free cash and 'some' income but being careful not to go into the higher rate tax bracket. If you took the pension in stages over a couple of tax years then you would avoid the need to pay any higher rate tax.

Some pensions offer drawdown, some don't. You can always switch pensions if it does not and you should seek independent financial advice to do this, the adviser can then explain drawdown along with all your options.

Please note, pensions offer excellent legacy planning benefit's and protection from tax whist retained. If you have separate cash/investment's you may want to utilise those first.

An IFA will be able to recommend a suitable strategy for you.

iwmtaxadvisor
Posts:23
Joined:Wed Sep 09, 2020 5:12 pm
Contact:

Re: please help me before I cash my pension

Postby iwmtaxadvisor » Mon Jul 05, 2021 10:36 am

> If I cash my pension, do I have to inform HMRC
Yes, under self-assessment you have to inform HMRC of taxable events. And actually the life company would have also told HMRC.
Remember that it's not HMRC's job to tell you what they are missing from your tax computation.

> are they likely to tax it again just like they are taxing my state pension at the moment.
Yes, if you get into the higher rate of tax (see above reply). Again, your job to tell them of a tax shortfall.
Actually HMRC in my experience apply the single persona' allowance first against the State Pension.

> What about if I only take the free lump sum of £9500.
Not reportable (as long as there is no Lifetime Allowance triggered which there is not in this case).

A 32k car? sounds nice. I just wanted to point out that if you used this in your self employment there may be allowances to use which would reduce your taxable income.
One more thing. Have you considered the option of using the pension as income to fund the purchase of a second hand car similar in status to the one you want to buy? With the advantage that after five years (say) you still have the pension income and the car, which you can trade in for a newer one.
- look for us on Google "iWMTaxAdvisor"


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