Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

Withdraw small lump sum asap?

sackofspuds
2 Lemon pips
Posts: 115
Joined: January 5th, 2017, 1:04 am
Has thanked: 225 times
Been thanked: 16 times

Withdraw small lump sum asap?

#439721

Postby sackofspuds » September 4th, 2021, 7:18 pm

My wife is 57 and has £6k in an AJ Bell SIPP.

Her main pension when she retires will be a Teacher's Pension; career average. Very complex rules about taking that pension in that you can't take it and still work full time. Anyhow, I digress.

Any downside to her just withdrawing the £6k now given its a "small lump sum":
https://www.youinvest.co.uk/pensions-an ... n/lump-sum

It won't affect her marginal rate of tax were she to take it either now or in retirement, ie, basic rate now and will be basic rate when retired.

We don't need the £6k. This would be mainly a simplification exercise and to safeguard against future rule changes. The money would be invested in her Interactive Investor ISA most likely.

ursaminortaur
Lemon Half
Posts: 6944
Joined: November 4th, 2016, 3:26 pm
Has thanked: 447 times
Been thanked: 1718 times

Re: Withdraw small lump sum asap?

#439748

Postby ursaminortaur » September 4th, 2021, 11:05 pm

sackofspuds wrote:My wife is 57 and has £6k in an AJ Bell SIPP.

Her main pension when she retires will be a Teacher's Pension; career average. Very complex rules about taking that pension in that you can't take it and still work full time. Anyhow, I digress.

Any downside to her just withdrawing the £6k now given its a "small lump sum":
https://www.youinvest.co.uk/pensions-an ... n/lump-sum

It won't affect her marginal rate of tax were she to take it either now or in retirement, ie, basic rate now and will be basic rate when retired.

We don't need the £6k. This would be mainly a simplification exercise and to safeguard against future rule changes. The money would be invested in her Interactive Investor ISA most likely.


Just make sure, as it says in the link, to inform youinvest that you want to take it as a small lump sum rather than just withdrawing it using UFPLS. That way it won't count against the LTA limit and won't trigger the MPAA limit on future contributions - so she could if she wished in the future contribute more than £4000 to a SIPP or if she left teaching and took up some other job to an occupational DC pension.

sackofspuds
2 Lemon pips
Posts: 115
Joined: January 5th, 2017, 1:04 am
Has thanked: 225 times
Been thanked: 16 times

Re: Withdraw small lump sum asap?

#439761

Postby sackofspuds » September 5th, 2021, 7:41 am

Thanks ursaminortaur.

Govt says you can take 3 of these small pots:
https://www.gov.uk/tax-on-pension/tax-free

I guess potentially I could reclaim tax on £30k this way.

I open a SIPP, deposit £10k from my net salary, reclaim the higher rate tax, then withdraw it as a small lump sum. Repeat twice more.

Bit of an administrative hassle but a tax saving of £12k.

Presumably I'm not the only person to have thought of this. I wonder if this exemption is being abused? If so, I imagine.the rules may be changed.

In my wife's case it actually makes sense to top up her small pot to £10k before withdrawing it.

Myfyr
2 Lemon pips
Posts: 130
Joined: November 4th, 2016, 2:34 pm
Has thanked: 30 times
Been thanked: 28 times

Re: Withdraw small lump sum asap?

#439797

Postby Myfyr » September 5th, 2021, 10:44 am

sackofspuds wrote:Thanks ursaminortaur.

Govt says you can take 3 of these small pots:
https://www.gov.uk/tax-on-pension/tax-free

I guess potentially I could reclaim tax on £30k this way.

I open a SIPP, deposit £10k from my net salary, reclaim the higher rate tax, then withdraw it as a small lump sum. Repeat twice more.

Bit of an administrative hassle but a tax saving of £12k.

Presumably I'm not the only person to have thought of this. I wonder if this exemption is being abused? If so, I imagine.the rules may be changed.

In my wife's case it actually makes sense to top up her small pot to £10k before withdrawing it.


Only £2,500 of a small pot is tax free - the remaining £7,500 is taxable as income.

The whole lot can be totally tax free if enough personal allowance is available of course.

sackofspuds
2 Lemon pips
Posts: 115
Joined: January 5th, 2017, 1:04 am
Has thanked: 225 times
Been thanked: 16 times

Re: Withdraw small lump sum asap?

#439817

Postby sackofspuds » September 5th, 2021, 12:43 pm

Myfyr wrote:
Only £2,500 of a small pot is tax free - the remaining £7,500 is taxable as income.

The whole lot can be totally tax free if enough personal allowance is available of course.


Doh! It was v early when I came up with that - incorrect - wheeze; brain not fully engaged.

Alaric
Lemon Half
Posts: 6033
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1399 times

Re: Withdraw small lump sum asap?

#439818

Postby Alaric » September 5th, 2021, 12:48 pm

Myfyr wrote:Only £2,500 of a small pot is tax free - the remaining £7,500 is taxable as income.

The whole lot can be totally tax free if enough personal allowance is available of course.


Aren't the only differences to withdrawing the same amount from a consolidated SIPP, the effect on the Lifetime Allowance limits and what level of contributions can be made to an ongoing SIPP or similar?

Myfyr
2 Lemon pips
Posts: 130
Joined: November 4th, 2016, 2:34 pm
Has thanked: 30 times
Been thanked: 28 times

Re: Withdraw small lump sum asap?

#439840

Postby Myfyr » September 5th, 2021, 4:10 pm

Alaric wrote:
Myfyr wrote:Only £2,500 of a small pot is tax free - the remaining £7,500 is taxable as income.

The whole lot can be totally tax free if enough personal allowance is available of course.


Aren't the only differences to withdrawing the same amount from a consolidated SIPP, the effect on the Lifetime Allowance limits and what level of contributions can be made to an ongoing SIPP or similar?


Almost:

UFPLS, the taxable bit, is taxed at emergency tax rate.

Small pot, the taxable bit, is taxed at BR.

However the actual correct tax due is the same, it’s just a timing issue between the taxpayer and HMRC.

mc2fool
Lemon Half
Posts: 7812
Joined: November 4th, 2016, 11:24 am
Has thanked: 7 times
Been thanked: 3017 times

Re: Withdraw small lump sum asap?

#439849

Postby mc2fool » September 5th, 2021, 4:52 pm

Myfyr wrote:Small pot, the taxable bit, is taxed at BR.

Not at the basic rate but at your marginal rate, surely? The OP has stated they're a higher rate taxpayer so the taxable part would be taxed at 40%. (Or an effective 40 x 0.75 = 30% on the whole pot).

Myfyr
2 Lemon pips
Posts: 130
Joined: November 4th, 2016, 2:34 pm
Has thanked: 30 times
Been thanked: 28 times

Re: Withdraw small lump sum asap?

#439864

Postby Myfyr » September 5th, 2021, 5:51 pm

mc2fool wrote:
Myfyr wrote:Small pot, the taxable bit, is taxed at BR.

Not at the basic rate but at your marginal rate, surely? The OP has stated they're a higher rate taxpayer so the taxable part would be taxed at 40%. (Or an effective 40 x 0.75 = 30% on the whole pot).


No, the provider applies a BR code to a small pot automatically.

If this is too much or too little tax then that is between you and HMRC to correct any underpayment / overpayment.

Been there, done that, got the t-shirt. :)

This is what I implied in the last sentence of my previous post.

Search for BR in the following … https://techzone.adviserzone.com/anon/p ... small-pots

This differs from the emergency code treatment of UFPLS.

mc2fool
Lemon Half
Posts: 7812
Joined: November 4th, 2016, 11:24 am
Has thanked: 7 times
Been thanked: 3017 times

Re: Withdraw small lump sum asap?

#439865

Postby mc2fool » September 5th, 2021, 5:56 pm

Myfyr wrote:Small pot, the taxable bit, is taxed at BR.

However the actual correct tax due is the same, it’s just a timing issue between the taxpayer and HMRC.

Myfyr wrote:This is what I implied in the last sentence of my previous post.

Ah, I see. It's your terminology that's wrong, not your intent.

You said "is taxed at BR". No, it's taxed at your marginal rate. The BR code applied by the provider is simply a withholding, just as PAYE is. It's not the rate it's taxed at. It IS taxed at your marginal rate, as I said.
Last edited by mc2fool on September 5th, 2021, 6:08 pm, edited 1 time in total.

Myfyr
2 Lemon pips
Posts: 130
Joined: November 4th, 2016, 2:34 pm
Has thanked: 30 times
Been thanked: 28 times

Re: Withdraw small lump sum asap?

#439869

Postby Myfyr » September 5th, 2021, 6:26 pm

mc2fool wrote:
Myfyr wrote:Small pot, the taxable bit, is taxed at BR.

However the actual correct tax due is the same, it’s just a timing issue between the taxpayer and HMRC.

Myfyr wrote:This is what I implied in the last sentence of my previous post.

Ah, I see. It's your terminology that's wrong, not your intent.

You said "is taxed at BR". No, it's taxed at your marginal rate. The BR code applied by the provider is simply a withholding, just as PAYE is. It's not the rate it's taxed at. It IS taxed at your marginal rate, as I said.


In my defence, English is not my first language. :)

sackofspuds
2 Lemon pips
Posts: 115
Joined: January 5th, 2017, 1:04 am
Has thanked: 225 times
Been thanked: 16 times

Re: Withdraw small lump sum asap?

#439889

Postby sackofspuds » September 5th, 2021, 8:27 pm

mc2fool wrote:so the taxable part would be taxed at 40%. (Or an effective 40 x 0.75 = 30% on the whole pot).


Yeah so you could technically save 10% of tax, £3k, by contributing to 3 x small pots then withdrawing the funds. I guess some might consider it worth the hassle. Don't think I could be bothered, especially since I'm sure there's a chance HMRC would see it as a tax dodge.

For my wife though, might be worthwhile just cashing in early to simplify things. Probably won't bother though because A J Bell will allow you trade more exotic investments than Interactive Investor, eg, some US ETFs.


Return to “Pensions - Practical Problems”

Who is online

Users browsing this forum: No registered users and 6 guests