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TonyTax, Tax Consultant
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I am due to take early retirement and I have 3 pensions with

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Hi. I am due to take early retirement and I have 3 pensions with the option to take tax free lump sums which I intend to do, however, I intend to take all of the contributions from the other 2 pensions. I presently am in the 40% tax bracket. If I waited until after 5th April 2017, then only receiving 17k/annum pension, would I be eligible to withdraw the contributions of the 2 pensions at 20% as opposed to 40% ? Thanks. Michael
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Hi. My name is*****'m looking at your question now and will post my answer or ask for more information here in a short while.

The amount of tax that will be deducted will depend how much you withdraw after 5 April 2017 and who your pension plan providers are.

Having done some research on the new pension rules and how the pension plan providers deal with withdrawals in the recent past and I can tell you that different providers have been using different approaches to how the payments are taxed. Some are using a Month 1 tax code which means that, assuming that the tax free lump sum has already been taken, then one-twelth of the personal allowance is given tax free (£11,000/12) and the balance is taxed using one-twelth of the 20% basic rate tax band (£32,000/12), followed by one-twelth of the 40% tax band (£118,000/12) with any balance being taxed at 45%. There are variations on this. I also understand that some providers will contact HMRC for tax code instructions.

I would advise you to contact each of the pension providers to find out how they will tax any sums you may take in 2016/17 on the basis that you will be a basic rate taxpayer (depending on the size of the pension lump sums you withdraw).

I hope this helps but let me know if you have any further questions.

Customer: replied 1 year ago.
A little more help please: I have £157,920.35 in one pension. I can take £39,480.09 as a tax-free lump sum (confirmed) leaving £118,440.26. Please could you calculate for me how much of the £118,440.26 would be payable to me after tax ? This is just one of my 3 pensions that I am dealing with as I am already in th process of taking a tax-free lump sum of £118752 from another pension. I will also be taking an annual pension of £17812 and presume that after my personal allowance of £11000 the remaining £6812 will be taxed at 20%. Hope I have got this correct. Thanks Michael

Are you planning to take the £157,920.35 in the curent tax year, 2016/17? If so, what is your projected income for 2016/17 excluding the lump sum?

Customer: replied 1 year ago.
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Customer: replied 1 year ago.
I was hoping to retire December 31st 2016. Following that my income will only be the annual pension of £17812 from that date. My projected income to December 31st 2016 is approx. £38k then from January to April just my pension of £1484/month so total projected income 2016/17 (up to April) would be £42452. This is excluding any lump sums. Thanks

I cannot call until around 6pm. Is that OK? If not, don't accept the call charge. I'm sure we can get to the bottom of your question using the text format.

Customer: replied 1 year ago.
Forget the phone call..........Thanks


Leave this with me while I look at your last post.

The taxable part of the pension lump sum will be £118,440 which when added to your salary of £38,000 and your pension of £4,452 will give you a total income in 2016/17 of £160,892. As your income will be over £122,000, you will lose all your personal allowance of £11,000 which will cost you £4,944.60 in tax (£10,892 @ 45% + £108 @ 40%).

The tax on your salary and pension will be £10,580.80 (£32,000 @ 20% + £10,452 @ 40%). The tax on the taxable part of the pension lump sum will be £47,920.60 (£107,548 @ 40% + £10,892 @ 45%).

The figures above are what the final gross tax liabilities will be and don't take account of tax deducted at source from your salary, pension and taxable pension lump sum.

As I said in my earlier post, different pension providers are taxing pension lump sums in different ways. If your pension provider uses a 1100L Month 1 tax code, the tax deduction at source will be £51,726.95 (£917 @0% + £2,667 @ 20% + £9,833 @ 40% + £107,023 @ 45%). That will be excessive by £3,806.35 (£51,726.95 - £47,920.60) but there will be an underpayment of £4,944.60 on your salary and pension due to the loss of the personal allowance which was mentioned above.

Customer: replied 1 year ago.
Wow.........that's complex. If I just take the tax-free lump sums from my 3 pensions (which would total £161,806.39) then take annual combined pension(s) of £17812.94 + £3324.55 + £222.72 (= £21360.21) in 2016/2017, would the £161,806.39 I take as tax-free lump sums count towards earnings in 2016/2017 and would this affect the tax I pay on my annual pension ? Sorry if you have answered this but I am trying to get the best deal as you no doubt understand by now ! Thanks for your assistance, it is appreciated. Michael

If you take the tax free lump sums only in 2016/17, they won't count as income in 2016/17 as they are tax free.

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Customer: replied 1 year ago.
Excellent. I have understood it now.,,,,,,,,,,,,,,,until next time !
Thanks for your professionalism.Michael