Tax credits and pension savings account

[pippa2000]

Hi there,

 

 

I'm 55 and have a personal pension plan that has a value of £17600.

 

 

Up until our disabled child was born I worked full time, when he was born I had to give up my job to become his carer. During this period of adjustment to our new financial situation we incurred some debt - £13000.

 

 

I thought great, I can take it all as a lump sum and we can clear the debt... only we are in receipt of tax credits since our joint income, husband and my carers allowance = £21,000 per annum.

 

 

However I've since realised that by doing this £75% of the lump sum will have to declared as income so basically will affect out tax credit award. So we would pay the debt off but have no tax credit income. So not really a viable option.

 

 

The other option is to take the 25% tax free lump sum (to get the leaky roof fixed) and put the rest into the retirement savings account to pay the debt when I retire.

 

 

If I do this, how will this this saving account be viewed for tax credit purposes. Will it still count as income even though we don't draw any money from it. It will be invested but could fluctuate wither up or down.

 

 

Thanks in advance

[Mr.P]

Your pension pot should be excluded from any benefit calculations until you cash it in. However, you should take a long, hard look at the implications of taking anything out now as you may well find yourself being liable for quite a bit of tax.

 

It may pay to have a chat with an independent financial adviser before you make any withdrawals. Perhaps take a "free" financial review with your bank if they still offer that service ?

[pippa2000]

Thanks for that... I would only be taking the 25% tax free lump sum out now (£4,400), the rest £13,200 will be left invested in the retirement savings account. Since I only have £17600 the cost of going to see an IFA would take a big chunk of this away, so I'm trying to avoid this. I've seen a government pensions advisor but they only give you your options not advise.

[pippa2000]

Anyone??

[honeybee13]

Hello there.

 

Who have you taken advice from so far please? For free advice, you have the Money Advice Service and the Pensions Advisory Service [TPAS] and probably others. They should be able to guide you. Our problem is that we don't know all of your financial circumstances and could end up giving advice that costs you money in extra tax or lost benefits.

 

There are rules that let you take 'trivial' pension pots as cash, but I'm not sure if the limit is as high as £17,500. If it isn't, my understanding is that you can take 25% of the fund as tax free cash as you say and draw the rest as income over the years. I wouldn't count on having the whole of the fund in cash at retirement age unless you take advice from organisations like the ones I've mentioned and they say it will be possible.

 

HB

[honeybee13]

I've just remembered Pensions Wise. Is that who you saw?

 

HB

[pippa2000]

Thanks @honey. I'm not really looking for pensions advice, I understand all of my options as I've had an appointment with pension wise.

 

The issue I have is how HMRC will view the £13200 that will be sitting in the retirement savings account. Will they view it as income (even though we are not drawing from it) or will it be treated as savings.

[honeybee13]

OK, thank you for the clarification. You would hope that until you draw out part of your fund that it would count as savings rather than income, but hopefully someone who knows more about tax credits will know the answer.

 

HB

[GamerNic]

Hi, I'm an ex-TC advisor. I believe you would not have to declare the lump sum as income. For savings and dividends you only declare interest. You would have to declare any pension payments received i.e. as an annuity - all of this is classed as Other Income section and the first £300 of total Other income is disregarded.

 

I did leave 6 months ago and am not up to date with pensions knowledge so maybe double check, here is the relevant part of the TC Manual available via Gov.uk, I have highlighted the bits I believe to be important.

 

https://www.gov.uk/hmrc-internal-manuals/tax-credits-manual/tcm0120140

 

Eligibility - income (other than earnings): Income - pensions (Info)

 

This subject provides guidance on pension income to be included and pension income to be excluded for tax credit purposes.

The remainder of this topic is presented as follows

Payments, pensions and annuities included as pension income for tax credits

 

You should include any of the payments, pensions or annuities listed below as pension income for tax credits. These mirror the income tax provisions. Broadly, this includes all occupational and registered pension scheme pensions and the basic retirement pension and related payments, for example the earnings related addition under the State Earnings Related Pension Scheme (SERPS).

 

• Any annuity, pension or stipend payable by the Crown or out of the public revenue of the UK or of Northern Ireland by virtue of Section 577 of ITEPA. From 6 April 2005, a person could defer their entitlement to their State Pension for a minimum of one year. Therefore, for 2006-2007 onwards, any lump sum payment of a deferred State Pension will be counted as income for tax credit purposes in the year in which it is taxable (Section 7 of Finance (No2) Act 2005 applies).
  

This includes any increase for a dependant child.

 

• Any pension, annuity or income withdrawal to which S579A© of ITEPA applies (charge to tax on registered pension schemes).
  
• Any lump sum payment to a member of a registered pension scheme to which section 636B or 636C of ITEPA applies. These are payments made when a person has a very small amount of pension savings (for example, from a short-term employment that has ended) which would only provide a very small pension in retirement. These lump sums can also include payments made when a pension scheme is winding up and small lump sum death benefits paid to a surviving dependant to extinguish their rights to a small pension. Note, however, that certain lump sum payments made under the terms of a registered pension scheme as part of retirement income are disregarded (below).
  
• Any unauthorised payments from a registered pension scheme to which S208(2)(a) or (b) of the Finance Act 2004 applies.
  
• Any pension paid otherwise than by or on behalf of a person outside the UK by virtue of S569 of ITEPA. These are occupational pension schemes not registered or approved for tax purposes. Pensions from overseas sources are taken into account as ‘Foreign Income’.
  
• Any pension paid otherwise than by or on behalf of a person outside the UK. Pensions from overseas sources are taken into account as ‘Foreign Income’ by virtue of Regulation 12 of the Tax Credit (Definition and Calculation of Income) Regulations 2002.
  
• Any payment or pension that is taxable by virtue of Section 633 of ITEPA (voluntary pensions).
  
• Any periodical payment granted out of the House of Commons Members’ Fund and taxable by virtue of Section 619 of ITEPA (parliamentary pension funds).
  
• Any annuity paid under a retirement annuity contract to which Chapter 9 of Part 9 of ITEPA applies.
  
• Other employment related annuities, which are chargeable as pensions by virtue of Section 609 to Section 611 of ITEPA.
  

Pensions and other payments excluded from pension income for tax credit purposes

 

The pensions and other payments listed below are to be disregarded as stated. These are non-taxable war pensions and any increase in pension payable as a result of injury on duty or a work-related illness.

 

• A wounds pension or disability pension to the extent disregarded under S315(1) of ICTA 1988 (War Pension).
  
• An annuity or additional pension payable to a holder of the Victoria Cross, George Cross or any other decoration mentioned in Section 317 of the Taxes Act 2001 (War pension).
  
• The amount of a pension or allowance to which Section 318 of the Taxes Act 2001 applies that isn’t taxable by virtue of S318(2) of ICTA 1988 (War pension).
  
• A pension or allowance by reason of payment of which a pension or allowance specified in Section 318(2) of ICTA 1988 is withheld or abated. The amount to be disregarded is the amount treated as falling within Section 318 by virtue of subsection (3) of that section (War pension).
  
• In the case of a customer in receipt of a pension under the Service Pensions Order, any increase in the rate of that pension in respect of a dependant who is not a member of the customer’s family (War pension).
  
• A mobility supplement, or a payment in respect of attendance, paid in conjunction with a war pension (War pension).
  
• Any supplementary pension under Article 29(1A) of the Service Pensions Order (War pension).
  
• A pension awarded at the supplementary rate under article 27(3) of the Personal Injuries (Civilians) Scheme 1983. The amount to be disregarded as income is the amount for the time being specified in paragraph 1© of Schedule 4 to the Scheme (currently £34.20 weekly) (War pension).
  
• A pension awarded on retirement through disability caused by injury on duty or by a work related illness. The amount to be disregarded is the amount by which the pension exceeds what would have been payable if the retirement had been on grounds of ill health caused other than by an injury or illness.
  
• Any lump sums paid by registered pension schemes which are exempt from income tax by virtue of Section 636A of ITEPA. These include lump sums payable on commencement of the retirement pension (below the tax free limit amount), refunds of excess member contributions, serious ill-health lump sums and some death benefit lump sums.
  
• Any free coal or an allowance paid in lieu to a former miner or his widow are exempt from income tax by virtue of Section 646(1) of ITEPA.
  
• Any payment in respect of contributions made under the payroll giving scheme by virtue of Section 713 of ITEPA
  

Edited March 15, 2017 by GamerNic

[pippa2000]

That's great GamerNic. I've been searching for some info like this, without luck so this is very helpful.

 

 

If I'm reading this correctly, of the £17600 pension pot, the 25% tax free lump sum (£4400) does not need to be declared and balance of £13200 can be saved into the pension retirement account and does not get viewed as income but savings and therefor does not need to be declared as income, unless of course we draw any further amounts which would also be liable for tax.

 

 

Again, thank you...

[smokiejoe]

Thanks for that... I would only be taking the 25% tax free lump sum out now (£4,400), the rest £13,200 will be left invested in the retirement savings account. Since I only have £17600 the cost of going to see an IFA would take a big chunk of this away, so I'm trying to avoid this. I've seen a government pensions advisor but they only give you your options not advise.

Any amount lump sum from pension pot income taken is treated as having 25% of it as tax free. You don't have a tax free amount to withdraw in it's own right. EG £17600 in pot but in one tax year you take 2 lump sums of £1000 each payment. Each payment is treated as having 25% ignored as non-taxable so £250 ignored and £750 counted as additional income in the year, giving a total of £1500 extra income. As it is counted under Other income, same rules as usual for Other Income apply, in that the first £300 of all Other Income in the tax year is disregarded, so the £1500 becomes £1200 to be included as income for tax credit calculations for entitlement, as long as that is the only Other Income in that tax year.

[pippa2000]

@smokeyjoe - Whilst I agree with what you say, my pension actually allow me to take the 25% tax free lump sum, the rest will go into a pensions saving account via my provider... any future money withdrawn will be taxed.

[smokiejoe]

If you're on tax credits and taking a lump sum from a pension pot, I'd advise you contact tax credits with details, they may not agree with your assessment of how it should be treated.

[ericsbrother]

that will have changed when the law changed. Normal when the rest is commuted to a pension and you then take that as a monthly/annual paymant as an income from an annuity contract. You cannot draw down on it though Take the advice regarding tax on a pension withdrawal under the new rules. You will need to talk to your pension scheme people to see what version they would normally apply.

 

QUOTE=pippa2000;5009364]@smokeyjoe - Whilst I agree with what you say, my pension actually allow me to take the 25% tax free lump sum, the rest will go into a pensions saving account via my provider... any future money withdrawn will be taxed.