If you are releasing money from your pension, under the Pensions Freedoms provisions, how do you make sure, within current regulations, that the taxman doesn’t take a huge chunk? That was the question a reader of iNews put to their financial expert this week. He wanted to know if his wife would have to pay tax on the money withdrawn from her SIPP (Self Invested Personal Pension) when she started to draw money from it.
iNews’s expert replied –
“There is a way that she would not have to pay tax, and this is as long as her total taxable income (which includes the state pension) is less than the personal allowance. In the 2017/18 financial year, the personal allowance is £11,500. So if her total pension pot was £76,000, she could take 25 per cent, or £19,000, tax-free from the age of 55 onwards – as permitted under the pension freedom reforms introduced in April 2015. She would then have £57,000 remaining, so she could take £11,540 each tax financial 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 £11,500 personal allowance and the excess would be taxed at either 20 per cent or 40 per cent.”