UKC

Hi All,

Asking for the other half who has not worked much in the UK, and has a private pension worth less then GBP 1,000 so tiny really. Not life changing, even for a day lol.

Intention is to get 100% lump sum tax free payment in the UK, as the value is so low.

So, I assume we can take 25% as tax free lump sum. What happens to the rest ?

Is that taxable ? How fast can we drawdown ?

Or can we take 100% lumpsum as tax free now ?

Assuming she is a UK Tax Resident.

PS - What if she is an overseas tax resident (we know the tax rules in the overseas jurisdiction and happy to pay tax in that jurisdiction) but will that help or hinder the intention to get 100% lump sum tax free release in the UK.

Thank you UKCers.

You can take 25% tax free. The other 75% gets taxed at your normal rate if you take it as a lump now or spread it over a longer period.

In the UK the 75% would be taxed on drawdown but if their income including any state pension

remains below the tax free allowance in that tax year it will be refunded by HMRC later. I've done this a couple of times.

The refund by HMRC - is that when a tax return is done, or by other means ?

Any idea of the current tax year tax free allowance at all ?

It's all laid out here: https://www.gov.uk/income-tax-rates

Currently £12,570.

Current tax free allowance is 12,570. You shouldn't need to do a tax return for this alone. Refund may come in about August following the April 5th end of tax year. Contact them online or by phone if in doubt. 

My overpaid tax has been hit and miss. Sometimes HRMC has sent me a cheque without me realising I overpaid.

Other times, I've just called them and it's been an easy process. No tax return required.

You are allowed to take 100% of in one lump sum. I am certain it will be tax free whatever she does with it as by implcation her earnings etc will be low.

Its really the only viable option any way.

Not quite sure I understand your post. The pension provider will have no idea of the withdrawers income and are obliged to deduct tax. They will inform HMRC who can see the whole picture and refund as appropriate.

There is a not well known provision in pensions whereby if your lifetime pension savings are less that £30,000 you can take it all in one go. From memory its tax free as well......

I believe its done on the assumption that at that level its not really worth taking a pension from that amount( which would be a very small annual payment). Basically they are enouraging you to take it as a lump sum.

Thanks all. UKC is such a great resource.

Hopefully given the above comments the pension fund will pay a 100% lump sum, and without tax.

But dealing with such organisations can sometimes be painful, all the arduous hoops one has to jump through one by one.   

Three lots of 10k

Only if you don't exceed the personal allowance for that year, otherwise it the usual 25% tax free, so no particular advantage

The pot is £1000......

Which has been covered by Pedro, in that the key measure is it will be tax free if their total income for the year is less than the personal allowance otherwise 75% of it will be taxed.

From your post I got the impression that you thought up to 30k could be claimed tax free, as it would be classed as a “small pot" pension because it was subject to different rules to a normal pension? I think there are any tax advantages to a small pot pension, the only difference is that if your decision is to cash all or most of it in it won't be questioned.

If you could claim 30k tax free, there would be a lot of couples I know with multiple small pots and claiming 60k a year tax free. 

Perhaps neilh is getting pension drawdown confused with the £30K tax free allowance on redundancy payments?

Not sure, it just reminded me of someone on Mr J's crafting forum telling her, as her hobby only makes her a few thousand profit each year, she didn't have to pay any tax. She may well have got away with not paying it as I'm not sure HMRC are bothered about a few hundred pounds, but she should pay tax on her profits and she does. 

I am  trying to put some perspective on what is in all regards £1000 saved up.

It is not really a pension, just some cash saved away.   

After retiring from local authority social work, I did some bits and bobs for a few years with a small vol org, who paid me on a self employed basis. The last tax return I did, the Revenue asked me if I was going to be earning more than £10k a year in the future. The answer was no, so they basically said they didn’t want to process any more tax returns from me.

Unfortunately even though it is only £1000 the pension provider is highly likely to tax anything above a 25% drawdown when they pay it out.

If they don't already have a tax code for you they will use an emergency code which can lead to a disproportionately high level of tax being deucted. In my case this meant that I was taxed at just over 30% on the money that I withdrew from my pension pot earlier this year and had to claim it back using an online form.

But it's not just 'cash saved away' - it hasn't been taxed before it's been saved (unlike other savings.)

I assume that was your only income at the time? Mrs J's pension takes her over the personal allowance, even after I've transferred some of my allowance to her. 

I'm in a similar(ish) position to the one you were in, but opted to be employed rather than self employed. Like you I don't earn enough to pay any tax, I do occasionally pay NI but that means I've only had to pay an additional  £90 or so rather than £800 for the years to count towards my state pension even though my contributions came to no where near £710?? There is also the employer pension contribution and due to my intermittent work habits I was actually eligible to furlough payments that amounted to more than I earned during that period the previous year?? 

It’s called trivial commutation by HMRC.  Note the word. 

I thought that applied to between 10k and 30k?

The last claim to her DC pension Mrs J made was for less than 5k, so didn't have to go through that route. She still had a similar experience to timjones. 25% was automatically tax free, but the rest she paid tax on and claimed it back later?

Are you saying there is a way claiming small  chunks of  your pension tax free and not having to go through the process of paying tax and then claiming it back if eligible? If so can you point me the the right direction. 

Ahem: https://www.litrg.org.uk/tax-guides/pensioners/how-do-i-cash-my-small-pensi...

Trivial commutation only applies to:

● salary-based (defined benefit) pension plans. These are pensions provided by an employer from which the pension paid out to you is based upon how long you were with the scheme and how much you earned; or

● certain employers’ defined contribution schemes (those that built up a pot of money) where a small pension is already being paid out to you. Note that the pension scheme has to be paying you the pension direct (called ‘in house’) – that is, the pot of savings has not been used to buy an annuity (an annuity is a regular income, usually paid for your lifetime by an insurance company).

When you first become entitled to your pension, many pension providers offer the opportunity to convert the whole (100%) of a ‘small’ pension into a one-off cash payment. This is known as ‘trivial commutation’ and the cash received as a ‘trivial commutation lump sum’.

Usually, a quarter (25%) of the value of most pension schemes can be converted into tax-free cash when the pension starts to be paid. This is the same for trivial commutation lump sums. A quarter (25%) will be free of tax and the remaining three quarters (75%) will be taxable as normal income in the year in which it is paid.

Note that in the case described by the OP, the pension pot in question is a private pension, which I take to mean a defined contribution pension.

Thanks for taking the time to look that up. When cashing in Mr J's small DC pension I did look briefly if there was a way of avoiding having to initially pay tax and then claim it back later, but it didn't seem obvious. I guess proving how much/little you are going to earn this year in addition to the pension claimed can't be done until the tax year is complete. It seems you have to go through the process of paying and claiming back whether the amount is 1k,10k or 30k? Unless anyone knows different?? 

It's a well known problem, apparently HMRC have not got round to setting up their systems to cope with people drawing down lump sums.  I drew £10k and got taxed on the assumption that my annual income would be about £120k.

Apparently the solution is to draw a small amount, maybe just a tenner, then wait for HMRC to notify your pension provider of your correct tax code before drawing a larger amount.

When you draw the £1k down you will receive it net of tax paid  

Use form P50Z to claim it back.

https://www.gov.uk/government/publications/income-tax-claim-for-repayment-o...

No, I had 2 (declared) occupational pensions plus my state pension. I think the phrase “trivial commutation” from neilh probably is what happened there - their judgement was that the work involved in harvesting my additional tax liability was more bother than it was worth. It did puzzle me at the time.

It was nearly 20 years ago but when I was renting a couple of properties out I had a letter giving me a couple of months advanced warning and subsequently a request for 23p from HMRC. I remember thinking at the time the cost of processing/collecting it was far more and a sensible approach would be to right off amounts below a certain value, but I had £10's not thousands in mind.

Fingers crossed they do the same with Mrs J's extra income, but I'm not holding my breath. 

Quite a mine field, but thanks everyone who has contributed.

That's my worry, even though the pension fund does have my wife's NI Number, and that she has earned zero UK income of any type over the last 20 years or so.

Paying tax free would be so much simpler, especially as it is so small. 

So, if the recipient is an overseas tax resident, does the pension fund have to withhold tax, or pay out as 100% tax free ?

The pension fund holders will understand the rules exactly. What have they advised you?

Haven't asked yet, just doing my homework. Once you claim a certain status, its impossible to back-track. 

Easier to pay tax in our home country based on world wide income.

It would be silly if any withholding tax (is there any ?) is greater then the UK tax value of just paying out this tiny value under UK rules and UK tax rates.

What are the various 'statuses' you might or might not be claiming? (I'm not sure you've been completely clear about that.) Why is your status ambiguous?

'Tax Residency' changes as to where you are following the 180 day rule IIRC, whereas Nationality and/or Citizenship are fixed. And domicile is a different kettle of fish altogether.

And not all countries follow the UK tax year of 5th April. (Why the 5th April FFS ?!?).

It's my birthday, my parents got a year's tax relief for me being alive for 12 hours.

It is worth speaking to a professional about your options regarding pension and retirement funds. My parents contacted a company called Hub Financial Solutions before they decided what to do with their retirement income. Could be worth contacting them if you are unsure? https://www.hubfinancialsolutions.co.uk/plan-your-retirement/converting-you...