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Pension cash

Discussion in 'General Discussion' started by koolpc, Feb 10, 2020.

  1. koolpc

    Capodecina

    Joined: Dec 2, 2004

    Posts: 11,582

    Location: Under The Desk, Wales

    My workmate has a couple of pensions. One is quite good of which he has decided to leave in situ until he retires.

    The other is not and was valued at only £30k apparently.

    He decided to take £10k out last year as it was tax free.

    Now, he wants to take another £10k out as he needs cash to sort out issues on his house. This time he will be taxed. He is a low income earner. Of the £10k, he believes he will pay £2k in tax.

    The question he has been asking in work is, will it affect his wages? He been told he may be put on emergency tax?

    Plus, if it does, surely it will only affect them up until the end of march as april is start of new tax year?

    I told him i would ask on a forum i use but he is arranging to see a financial advisor which work provide free of charge.

    Thanks
     
  2. Semple

    Soldato

    Joined: Mar 5, 2010

    Posts: 6,031

    Asking the IFA is best.

    I'd always presumed that if you drew on a pension whilst working then it would be taxed in a similar way to if you'd received a bonus for example. Your taxable YTD amount would increase, meaning you'd be taxed more. I may be wrong though :)

    I.e. If he was earning 12.5k and therefore not paying any tax (I'm aware this only kicks in in April - just using it as an example) and then adds a 10k pension payment. His YTD is now at 22.5k which means he'd pay the 20% tax on the 10k.
     
  3. Kemik

    Mobster

    Joined: Nov 7, 2005

    Posts: 4,836

    Location: Widnes

  4. Rotty

    Don

    Joined: Oct 18, 2002

    Posts: 40,124

    Location: Notts

    asking rather then questioning this as I know very little, other then the 4k limit above and obvious reduction in future pension what are other implications?

    This £4,000 is this just the employee part of the combined employer/employee total?
     
  5. peterwalkley

    Mobster

    Joined: Feb 23, 2009

    Posts: 3,380

    Location: South Wirral

    Payroll will have warned him about the emergency tax code thing as they may not have any idea how quickly HMRC will take into account the extra tax he'd be paying by taking the money out. As already said, its a really horrible idea taking pension money out early unless the situation is really desperate. Losing 20% of it to tax is awful. Can he not get a loan instead for the repairs ? If he's a property owner, he ought to get a decent rate - and certainly not 20%.
     
  6. Semple

    Soldato

    Joined: Mar 5, 2010

    Posts: 6,031

    Ah i didn't actually know this.

    So basically if you take out further money, you'll be limited to paying in £4,000 per year into your pension pot? Is that a combined contribution (i.e. employer/employee?).

    For the OP's friend, if he's truly a "low earner" that might be less of a concern? £4,000 a year works out at £333 a month. Assuming that is a combined contribution, he'd be limited to putting in £166 a month. Even if he only sacrifices 5% of his salary for pension, that would put him at nearly 40k a year?

    So probably won't be much of an issue for him?
     
  7. Kemik

    Mobster

    Joined: Nov 7, 2005

    Posts: 4,836

    Location: Widnes

    Both. As soon as you withdraw any money from your pension you change the restriction on your tax free maximum contributions for the year from £40k to £4k (ignoring the lifetime limit). The contribution is your contribution plus your employers. If he's on low salary it shouldn't impact too much but someone working in public sector with a defined benefit scheme will be losing a lot of additional benefit.
     
  8. Rotty

    Don

    Joined: Oct 18, 2002

    Posts: 40,124

    Location: Notts

    Thanks, any idea if that £4k is index linked?
     
  9. Kemik

    Mobster

    Joined: Nov 7, 2005

    Posts: 4,836

    Location: Widnes

    It's been £4k for a few years but I know the lifetime allowance is index linked.
     
  10. Semple

    Soldato

    Joined: Mar 5, 2010

    Posts: 6,031

    Doesn't appear to be.

    It was 4k back in 2017/18
     
  11. Rotty

    Don

    Joined: Oct 18, 2002

    Posts: 40,124

    Location: Notts

    Thanks, may be due an increase at some point then but who knows?
     
  12. dod

    Mobster

    Joined: Oct 31, 2002

    Posts: 3,784

    Location: Inverness

    I could be wrong but I think that only applies if you begin to draw down the remaining 75%. If you don't you can leave that pot alone, start a new pot and you've still got a 40K limit. It's a bit confusing

    https://www.thisismoney.co.uk/money...77/Can-25-lump-sum-leave-rest-pension-is.html
     
  13. Dazzy

    Gangster

    Joined: Jun 21, 2009

    Posts: 165

    Suggest getting professional advice however the information on the money advice service states the 4k MPAA applies to defined contribution rather than defined benefit schemes.
     
  14. Rotty

    Don

    Joined: Oct 18, 2002

    Posts: 40,124

    Location: Notts

  15. Uther

    Capodecina

    Joined: Jun 16, 2005

    Posts: 11,101

    If he's a low earner the 4k limit likely won't affect him much. In the real world I doubt most people are putting 40k a year in their pensions. He'll get hit with 20% tax (anything that takes him over 12.5k a year in 'earnings') but he will get hit with that if he takes the pension later anyway won't he so meh.
     
  16. Psycho Sonny

    Caporegime

    Joined: Jun 21, 2006

    Posts: 32,358

    There may also be national insurance implications depending on his age.
     
  17. EddScott

    Sgarrista

    Joined: Oct 18, 2002

    Posts: 8,210

    Location: Pembrokeshire

    This is correct. As long as you don't start taking income you won't be restricted by the £4K limit.

    Also, the tax free cash must always be 25% (at least from a personal pension) so not sure how he got £10,000 tax free from £30,000 total.

    If he takes £10,000, some pension companies will report to HMRC as Month 1 income - effectively an extra £10,000 per month.

    He'll possibly receive the £10,000 less 40% tax.

    There are HMRC forms to complete in order to recover the overpayment of tax.
     
  18. Uther

    Capodecina

    Joined: Jun 16, 2005

    Posts: 11,101

    I did read once that HMRC make quite a bit out of that as not everyone claims it back!
     
  19. koolpc

    Capodecina

    Joined: Dec 2, 2004

    Posts: 11,582

    Location: Under The Desk, Wales

    He is older than me, approx 58 i believe. He has a separate pension which has a good pot in it as he used to work in a university. The one he has with £20k left in it is like a draw down? He can take from it. He earns about £11k a year so low income. He not bothered about paying into a pension anymore as the uni one is good he said.

    Talking in work today he said he has arranged an appointment with an FA.

    The £20k is with Scottish widows i think he said. They told him that the tax would be taken out before it goes to him. So from £10k he would get £8k. What confuses him is whether or not his tax from his wages would be affected? Surely it cant be if Scottish widows take out tax from the £10k?
     
  20. Uther

    Capodecina

    Joined: Jun 16, 2005

    Posts: 11,101

    If he's on 11k then he will still have 1.5k of tax free allowance left, so shouldn't lose 2k from a 10k sum (as far as I understand it, might be from April too if he hangs on a bit)
    I'm sure his IFA will explain it all to him.