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.

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