Staggering the payments may result in a taxfree pension

Q MY wife and I both contribute £2,880 each year into SIPP pensions (self-invested personal pensions) and £720 of tax relief is added so £3,600 is invested into our funds.

My wife is a non-taxpayer and is likely to remain so.

Will she have to pay tax on her pension when she withdraws the money?

Name and address supplied. A YOUR wife will not pay tax if her total taxable income (which includes the state pension) is less than the personal allowance, in 2019/20 it is £12,500.

So if her pot was £76,000 she could take 25% or £19,000 from age 55 onwards tax-free. She would then have £57,000 remaining so she could take £12,500 each tax year for five years and pay no tax on the pension.

If however, she took the remaining £57,000 as a single payment in one year, this would exceed the £12,500 of personal allowance and the excess would be taxed at either 20% or 40%.

Investing £2,880 annually into a pension is an excellent choice for most non-taxpayers; including children and especially those with estates which will be subject to inheritance tax and with sufficient capital and income from other sources to not require the money for daily life.

That’s because a non-taxpayer receives tax relief on the contributions they make to the pension: for every £100 paid into the fund, HMRC will add a further £25.

The £2,880 figure is the maximum annual pension allowance for a non-taxpayer, so with tax relief included the total paid into the fund is capped at £3,600 per year. (Taxpayers receive tax relief on contributions up to their annual income or £40,000, whichever is lower.)

A pension fund can be accessed at any age after 55, with no maximum age.

The minimum age of 55 will increase to 57 from 2028, and will be linked to the State Pension age minus 10 years thereafter. Warren Shute is the author of the bestselling personal finance book The Money Plan. Send your questions to themoneyplanner@warrenshute.com. Get his free money guides at warrenshute.com