Cashing in a UK Pension

From April 2015 new pension freedoms became available to those aged 55 and above. There is a concern that many will not understand the tax implication of withdrawing too much cash from their pension pot and could end up with an unexpected tax bill. This webpage hopes to highlight some of the pitfalls and suggest a strategy that may work for some people.

We will use the terms "Pension Pot" and "Pension Fund" interchangeably. They mean exactly the same thing. Most pensions savings are held in funds but, with the new rules from April 2015, many people will be using there pension saving more like a bank account - a pot of money that can be withdraw on demand.

moneytopia.org.uk is neither authorised by or regulated by the Financial Conduct Authority. Everyone has different needs and situations. If you are in any doubt, consult a financial adviser regulated by the Financial Conduct Authority.

5 Tips For Avoiding Pension Scams

Which? has a on how to keep your pension pot away from scammers.

Is 25% of Cash Taken Out of a Pension Pot Always Tax-Free?

It all depends on how your pension provider has decided to operate your pension scheme. They may allow you to choose. If not, you may need to transfer to a different pension provider to obtain the service you require.

From April 2015 it is expected that there will be two ways of withdrawing cash from a pension pot. One method is for the first withdrawals to be 100% tax-free until you have withdrawn 25% of the value of your pension pot after which time, all further withdrawals from the pension pot will be taxed at your marginal tax rate. The other method is for 25% of each and every withdrawal from your pension pot to be tax-free and the rest to be taxed at your marginal tax rate. If you do not know what a "marginal tax rate" is, don't worry. We will explain it later. Marginal tax rate is very important and could significantly reduce the amount of cash you receive when withdrawing cash from your pension pot.

What Information Do I Need to Collect Before Taking Cash From A Pension Pot?

You need to make a list of all taxable income that you are likely to receive in a tax year. The tax year runs from April 6th of one year to April 5th of the next year. If you have income that arrives sometime in the first week of April you have to be careful as to which tax year it occurs in.

Taxable Income

The sort of income that you need to record includes:

• State Pension
• Company Pension(s)
• Taxable State Benefits
• Employment Income
• Savings Income
• Dividends
• Government Bonds

Do not assume that income that is paid to you tax-free does not have to be included. The State Pension is paid tax-free because it is assumed that most pensioners do not have sufficient income to pay any income tax. Most State Benefits are paid tax free, again because it is assumed that most pensioners do not have sufficient income to pay any income tax. Employment Income may appear to be paid tax-free. It all depends on how much you earn and what your tax code is. Savings income (e.g. bank and building society interest) is normally paid with tax deducted but those with small income can apply to have it paid without tax being deducted. If you expect your income to be the same in this tax year as it was in the previous tax year, the following will give an indication of the amount you need to record.

State Pension

Record the value of the payments received.

Company Pension(s)

Record the gross value from a P60 which the pension payer should send you each year - usually around May.

Taxable State Benefits

Record the value of the payments received.

Employment Income

Record the gross value from a P60 which the employer should send you each year - usually around May.

Savings Income

If possible get a "Certificate of tax deducted" from the bank, building society etc. and record the "Gross Interest" value. If you cannot get a "Certificate of tax deducted" use one of the methods below.

If Interest Paid Gross

Record the value of the payments received.

If Interest Paid After Tax Deducted

Add the payments received and then divide by 0.8 to obtain the gross amount. Record this gross value. For example, if you receive £10 interest every month, the total amount received is £120 in the tax year. Divide this figure (£120) by 0.8 to obtain £150 which you will record as the gross value.

Changes after April 2016

It is expected that interest will be paid gross from April 2016 and that the first £1,000 of interest will be tax free.

Dividends

Dividends usually come from stocks and shares, Unit Trusts or OEICs. Sometimes you will get a tax certificate for each dividend paid to you which will list the dividend paid and a "tax credit". Record the sum of the dividend paid and a "tax credit". If you hold stocks and shares, Unit Trusts or OEICs though a service company, that company should send you a "Consolidated Tax Certificate". Record the value of the "gross" amount.

It is expected that the "tax credit" will be abolished from April 2016 and that the first £5,000 of dividends will be tax free.

Government Bonds

Government Bonds are paid gross. Record the value of the payments received.

Premium Bonds

The winning of Premium Bonds are tax free and should not be recorded.

NISAs

NISAs and their forerunners ISAs and PEPs are tax free and any income or withdrawals from them should not be recorded.

More coming soon