Pensions and tax explained

Jonny: Hello, we are about to talk to you about tax and pensions. We’re all excited! I mean, I am, I never thought I’d be on something like this. But a lot of you are here and 4,500 people have signed up to today to listen about tax and pensions. So it must be very, very important and to speak to us about that, I’ve got Clare from Royal London. Everyone, give a round of applause to Clare!

So it sounds like a complicated issue we’re going to talk about today, tax and pensions. But as I said, we’ve got a lot of people on here and we want to know where everyone’s from, so I’ve noticed in the chat already we’ve had loads of people telling us where they’re from, so let us know. We’re joined today with Lee and Rachel, they’re going to help tell us all your questions about pensions and Clare’s going to answer. So, hello guys, how you doing? Can we have a shout out from people, names, where they’re from?

Lee: We’re got Mick from sunny Scarborough. Debbie from cold and windy Lincolnshire. We’ve got some Scottish places, Glasgow good to see, so plenty of people all over the place.

Jonny: Brilliant! So have we got anyone from Grimsby though, we’re in Grimsby today. How are you finding it? You stayed here last night?

Clare: I stayed here last night, yes.

Jonny: Loving Grimsby, we’re from Grimsby and it’s lovely weather outside. I think, the blinds are closed. Ok, so let’s get on with this. So a couple of things I want to talk to you about before we get into it, So Pension Awareness this year we’ve partnered up with Pay Your Pension Some Attention, I don’t know if you’ve seen the rap from Big Zuu, have you seen the rap from Big Zuu?

Clare: I have!

Jonny: So check out the website Pay Your Pension Some Attention, that’s a campaign that’s partnering with us this year and everyone should pay their pension some attention should they?

Clare: Yeah, definitely. I think it’s important just to know what you’ve got going in your pension and think about the future.

Jonny: I totally agree, I totally agree and all these people who are joining us today are paying their pensions some attention and by doing that you could win some Golden Geek Glasses. Clare, you put the Golden Geek Glasses on there.

Clare: Ok, oh they’ve very lovely.

Jonny: We’re having a bit of fun here, but you look great in them! But by joining us today on our TV shows and the ones throughout the week – we’ve got 16 going on – your name will be put into a hat and we’ll randomly pick you out, but also we have a first prize, second prize and third prize. Top prize is £75 Marks & Spencer’s vouchers, pretty good hey? I love a Marks and Sparks so I don’t get to go there much but I like a meal deal from them and second prize is £50 and third prize is £25. So that’s great. So round of applause for that, woo from the crew and all that – great cool! We love that.
Ok next we’re gonna go, let’s kick this off, so a lot of people have come here to listen to us today about talking about tax and pension. So Clare, tell us, where do we start when it comes to paying tax on our pensions and pensions and tax. Where do we start with this?

Clare: Well, what I thought it would be useful to start with is just a bit of a reminder about the difference between the two main types of pensions because when we talk about money coming out of a pension later, then there are some slight differences. So, the two main types we’ve got are defined benefit pensions, now that’s where there’s a promise to pay you and normally it happens when you stop working you get this pension every month, a bit like a salary, but less. You probably get some tax free cash as well and then that promise to pay lasts until you die. And you know, it’s a really good benefit and if you’ve still got a spouse or a partner alive then they would get maybe half of your pension.

Now that’s different from defined contribution pensions, now that’s the type of pension where you kind of save into a pension perhaps your employer saves in as well and most people now would be in a defined contribution scheme and it’s a pot of money. You can take it as, well just now you can take a pension when you’re 55, you don’t have to, it’s going up to 57 in 2028. You don’t have to stop working to get access to that, but you have to make sure that you’re going to have enough money to live on until you die basically. But that fund can be passed on and we’re going to talk about that a little bit.

Just to give a bit of an example, you know there are some people who were in defined benefit schemes kind of from longer ago, but the main type of defined benefit schemes that are open now are public sector pensions, so if you’re a firefighter, if you’re a nurse or a doctor, you’re a police office then you will be in a defined benefit.

Jonny: So a lot of the population are in these sectors aren’t they?

Clare: Yeah you’re right, you know the NHS I think the biggest employer, so yeah a lot of people are in those types of schemes and that’s why I think it’s useful to kind of explain the difference up front as a bit of a reminder before we then start talking about tax and what happens when you take money out.

Jonny: That’s good to know, that’s good to know. So what the next steps then? So we know that both different sort of pensions, what are the tax implications and all that sort of thing?

Clare: Well, I think what we want to think about now is paying money into a pension and that’s because when you pay money into a pension you get the benefit of tax relief and that’s a good thing, it really is.

Jonny: We love tax relief, we don’t hear that much but tax relief is good!

Clare: And I’ve just got a bit of an example on screen just now which shows what happens when tax relief and essentially it’s a top-up from the government. So as you’ll see on screen just now, if you’re a basic rate taxpayer and we’ll look at £100 here if you pay in £80, then the government will top that up by £20, so £100 goes into your pension. If you’re a higher rate taxpayer and then it’s £60, £20 and £20. And just another thing to kind of explain at this point and that’s if you’re paying into an individual pension or you’re paying into a pension where you know, it’s a workplace scheme but you might have to claim back the benefit of your higher rate or additional rate tax as well. So you’ll still get the £20 but to get that additional £20 or £25 if you’re an additional rate taxpayer, you might have to phone up HMRC or in your self-assessment you would say what your pension contribution has been.

Now it’s slightly different if you’re in a salary exchange scheme or you’re in the type of pension scheme where they take your pension contribution off before you pay tax on it because then you’ll get that full benefit of that either 20%, 40% or 45% tax. So key point to remember here is if you are a higher rate or an additional rate taxpayer check what type of scheme it is and whether you need to do something because you might have been missing out on money.

Jonny: So key point check what scheme it is?

Clare: Check what scheme it is! Make sure you’re not losing any money. So, tax relief is great. And another thing to mention is that we’re limited to the amount that we can pay into pensions to get the benefit of tax relief and normally it’s your relevant earnings. Now that’s one of these funny phrases we use, what does it mean? Well, if I earned £20,000 it would mean I could pay £20,000 in pension contributions. Now most people are not going to pay all of their pay into pension contribution. We’ve got to live, but it might be that you inherited a £100,000 and you’d like to put some into pensions and you’d only be able to put £20,000 in that tax year into pension so that’s a key one to remember.

And also another key point is that even if you’re not a taxpayer you can still get tax relief so you can pay £2,880 a year, which is topped up to £3,600. So, maybe if you’ve a non-working spouse for example they can still be making pension contributions now.

I also mentioned something called salary exchange and salary exchange for most people is a good idea. Now your employer may or may not offer this but it’s good, another key point: check does your employer offer salary exchange? Now, what is that?

Jonny: I was going to say, what is salary exchange?

Clare: Salary exchange, sometimes in the past known as salary sacrifice.

Jonny: I’ve heard it called that.

Clare: Now essentially this is a way to save if National Insurance and National Insurance well it’s just another tax. So actually if we can save it that’s a good thing. Now what happens kind of technically is that if before I was paying an employee pension contribution, my employer was paying an employer pension contribution. We make an agreement and my employer says I’ll pay it all as an employer pension contribution, so I might be getting the same amount going into my pension as before. I actually have more take-home pay or I can have more going into my pension and have the same amount of take-home pay. So I think it’s a really good thing, so check if that’s something that applies. For most people, it’s a good idea if it would take you below the minimum wage then you’re not allowed to do it, But your employer will keep you right if they offer it.

Jonny: So this is optional then? You don’t automatically have to do it?

Clare: No, so you have to decide you want to do it, but a lot of people might have heard of it and you know, it’s one of these thing you know were talking about paying your pension some attention, you know have a look at this and is it something I can do? Because if you can save National Insurance then that’s a good thing.

So that’s when we think about money going in, tax relief good. But because we get the benefit of tax relief on the way in then we have to pay tax on pensions on the way out.

Jonny: Wait there, we’re paying tax on pensions then?

Clare: Yes we are.

Jonny: Obviously the title gave it away! Yeah tax on pensions when it goes out.

Clare: So the thing that most people know about pensions though is when you ask them, we’ve carried out surveys, they know that they have an entitlement to 25% tax free cash.

Jonny: I’ve heard that a lot, 25% sounds great yeah?

Clare: And that’s because a lot of people when they can access pensions think I want to take that money out and go on a holiday, you know, put in a new kitchen. I want to buy a nice car, whatever so people know about that, now what actually happens when you get that 25% tax free cash it comes, you know, something else has to happen. So you either have to move the other 75% into something called drawdown now that’s within the pension environment, it stay invested and hopefully is growing. Or you have to buy a secure income, an annuity. So that’s another thing. Or you’re starting to take your define benefit pension that we mentioned or you can take something called a cash lump sum. Now these work a little bit differently. So with a cash lump sum for every payment you get there’s a 25% taxed a zero and 75% which is taxable but you get both of those parts together. Now, I’m going to go over an example because I think it makes a little bit easier.

Jonny: We love an example!

Clare: So, we’ve got Paul in our example, and Paul wants to know about what’s the most tax efficient way to take out his money?

Jonny: Paul looks very healthy

Clare: Paul is a very healthy 55 year old here. So Paul is still working and he is earning £45,000, he’s got a pension pot of £100,000 and he’s a basic rate taxpayer. Now I should say and I should have mentioned this earlier when I talk about tax relief when I’m talking about this if you live in Scotland and you’re watching this, then tax rates are different. We have different rates of tax, and we have instead of 40% you pay 41%, instead of 45% you pay 46%.

Jonny: It’s just a 1%?

Clare: Yeah, but we also have a 19%, so some people will pay less tax in Scotland. Some people will pay more in tax, so it kind of really it varies.

Jonny: It’s nice to make it a little bit more confusing.

Clare: Yes indeed, so just these examples are all based on England and Wales because it makes the sums a lot easier. So he is a basic rate taxpayer, now he wants a new kitchen that is £25,000, now he knows he can access his tax-free cash, but he’s heard there’s kind of two main ways so he doesn’t want to buy an annuity. He’s still working, so he wants to look at the ways to take it. Now what he can do if we move on to the next slide, he’s looking at taking either a cash lump sum or moving the money into drawdown. Now if he takes a cash lump sum he’ll get £25,000 which is taxed at zero and £75,000 which will be taxable.

But that £75,000 is going to sit on top of his salary of £45,000. So he’s actually going to have taxable earnings of £110,000. So he’s going to pay a lot of higher rate tax there. And the other thing is that actually he doesn’t need that £75,000 and it might just sit in his bank account doing nothing not earning much interest.

Jonny: So there’ll be a lot of people doing that won’t there?

Clare: Yeah, so if you’re still working then probably taking a large amount out by a cash lump sum is not a good idea. So actually for Paul the best idea is to move his money into drawdown. So, then he can take his £25,000 tax free cash. He can take that and the other £75,000 well that’s going to stay invested in the pension environment and hopefully will grow as well. So that means that money is there and only say when he stops working then he could start to take some of that money out as income.

So it means his taxable earnings are still just his salary because he’s only taking tax free cash. And I think the other point to make is because say he doesn’t need £25,000, say he wanted to go on a luxury holiday and he needed £10,000 well in that scenario he could just take what he needs. We take £10,000 as tax free cash and move the other 75% the other £30,000 into drawdown. Now why is that beneficial? Well, it’s because the money he then leaves in his pension pot, that’s £60,000, well it’s going to grown and actually means he could end up getting more tax free cash. So say it grew to £65,000, he’d be entitled to more tax free cash than if he’d taken everything at once and moved it into drawdown. So taking kind of what you need is one of the best things to do.

Jonny: I like that, I just assumed that you had to take the 25%.

Clare: No, you can take it in stages in fact, say Paul wanted to go part-time, he didn’t need a lump sum for anything, but he just wanted to top up his income a little bit. So he’s maybe phasing into retirement. So he decides to take £250 a month tax free cash, so £750 then gets moved into drawdown. So that’s good, tax free cash not sitting on top of his income at all and the rest is moving into drawdown slowly. So you can do it that way, so I think the benefit of drawdown is from a tax planning point of view, it’s a good thing you can always structure it. So when he actually stops working perhaps and he gets his State Pension, then he could make sure well actually I want to make sure I’m always a basic rate taxpayer or even I want to stay below the personal allowance. He can take what he needs to work that out.

Jonny: There’s going to be lots of people on here today that, well we’re all different aren’t we? So what I might do is going to be different but we’ve got that flexibility, I like that, we can do what works for us.

Clare: Yeah, and I think it is about you know how much do you need, often people do have an idea of what they want to do with their pension money, they’ve maybe been thinking about it for years and you know so that that might impact it.

Now, that’s thinking about Paul, with his defined contribution pot, but if we have a look at the next slide, it’s useful to kind of look at the difference with someone who’s in a defined benefit pension. So here we’ve got Lily, who is 60 now, she’s just retired as an NHS nurse, so she’s stopped working. She actually has a choice she could take money as tax free cash and some money as income or she could take no tax free cash and take a higher amount of income. But most people would take some tax free cash so Lily is going to take £45,000 of tax free cash. Now she’s going to have £15,000 a year, you know, we spoke earlier about how valuable these benefits are and I was telling you before that my grandpa will a hundred quite soon, he was in a public sector scheme so that scheme has been paying for all of his life and you know and he’s not had to worry about it, it just keeps paying out. So you know, this is a real benefit. It will go up every year, it starts at that, it’ll go up and normally in line with CPI.

Jonny: CPI? What’s that?

Clare: So that’s the inflation measure which has been in the press a bit, are we going to see the pensions triple lock? So there’s been a lot about triple lock, so what impacts that going to have? and public sector pensions will often, in fact, most people’s defined benefits pensions will increase by inflation.

Jonny: These sound really good.

Clare: They are really good, what’s the downside? Well, you’ve not got the flexibility. So Lily has that £15,000 and she can’t ask for a bit less so she could take maybe more in the future, she has to take that amount that’s what she’s going to take now she’s 60, so she doesn’t receive her State Pension yet, when she receives her State Pension and it kind of sits at the bottom of the tax stack and you know any other income on top so it would mean that her £15,000 of pension income just now well her personal allowance would cover the majority of that. But when she had State Pension of you know, say about £10,000 then £5,000 of her NHS pension would then sit on the top of that and then she’d be paying tax on the other £10,000. So there’s not the same flexibility. So difference between Paul and Lily well you know one has a bit more flexibility, one has a guaranteed pension and but they both have an element of being able to take some tax free cash. But there are just some difference between them.

Now it’s worth mentioning that pensions are just taxed like salary, so you know as I mentioned with Lily, so if I had £20,000 of pension income of whatever amount then my personal allowance applies first and then I would pay tax on the difference. But I think it’s worth a mention of emergency rate tax and that’s because they are taxed like income, so if someone had a bonus one month it would kind of sometimes the tax system expects you to get that bonus every month. And well in the pension world say Paul had taken that £75,000 and he that income of £110,000, HMRC would think he’s going to get £75,000 every month. And so he would be paying emergency rate tax which means he’s not only paying basic rate, higher rate, he’d also be paying some additional rate tax. And I think that’s key if people want to take out extra money from their pension and to understand that if they you know say in Paul’s case you wanted to say the kitchen was £30,000 and you know it’s good and then it would mean that you know he’s going to pay more tax, so it’s just so that people are a bit weary that they’ll have to kind of get in touch with HMRC and say this isn’t happening every month and it’s only this month so they can claim it back or they can wait for the tax system to fix itself.

Jonny: So I mentioned to you before so recently something had happened to my payslip and I was paying a bit more tax than I should be and I think it might have been because I got more money than I thought I was going to get, anyway and I got an emergency tax code. I had to phone them up, I was on there nearly an hour, but when I did it they were brilliant they sorted it out in the next month or so it was sorted.

Clare: They are really helpful when you get through if you are someone that fills in a self-assessment form you can also go online and you can alter it. So it might you know you can change what your expected earnings are so if you get a bonus or something like that you can do it that way but it’s one I think that its good for people to be aware of and just so they’re not expecting to get a certain amount of money, and actually they don’t get all of the money that they’re expecting.

Jonny: Yeah, it’s not good when you’ve got your heart set on something or expecting something you plan to that yeah I understand that.

Clare: So yeah that’s kind of about emergency tax, I think we should also talk about some of the other things that might happen in relation to pensions. So some people might have heard of something call the money purchase annual allowance. You know in pensions legislation they love these horrible, horrible phrases.

Jonny: I thought that was quite a nice one for pensions.

Clare: It’s quite long though, so that’s what happens if somebody has flexibly accessed their defined contribution pensions, so what do I mean by flexible access and what does it mean? Well, it means that they’ve taken their pensions out in a certain way and I’ll come to that in a second. Now if they do that, then it means they’re limited to what they can pay into pensions, so if you’re still working and you want to take some money out, but you still want to be paying money into pensions then this is really important and I think it’s a key point for you to kind of make sure you know what’s happening. Now if this applies it means that you will be restricted to £4,000 a year of pension contributions. And that’s you and your employer, if you go over that £4,000 you’ll have a tax charge. Now it’s not a penalty for bad behaviour, this is just kind of what would happen really it’s HMRC getting the benefit of the tax relief back and why do they do this? Well, and this is to make sure that people aren’t getting two bites of the cherry so you could have someone who wanted to take a lot of money out of pensions but know about tax relief and it’s a good thing and so then they want to pay more into pensions so it’s saying that that’s really not on.

So the two times this would happen are if you take more than your tax free cash and you take any income from drawdown, so in Paul’s case and he already taken his tax free cash before but if he actually stopped working and decided to start taking say a £1,000 of pension income a month he would trigger the money purchase annual allowance. Now, even if you took one pound of income, it would trigger it. And the other time that I think it’s you know for most people it would apply is if they take any amount of those cash lump sums, so even if they took £100 you would have £25 taxed at nothing but you have £75 that would be taxable, it would trigger this money purchase annual allowance. So if you’re still working and you want to pay more that £4,000 in taking cash lump sums that’s probably not a good idea. Now it doesn’t apply if you only take your tax free cash and move some money into drawdown or you buy an annuity. And it doesn’t apply for anybody who’s in a defined benefit scheme, so in our scenario Lily it wouldn’t apply to Lily. So that’s kind of one to you know keep an eye on now your pension provider will tell you if you have exceeded the money purchase annual allowance and then it’s your responsibility to tell any other pension companies you’re with so you know people have different pensions with different companies don’t they? So you know if one told that it happened then I would have to tell the other companies.

Jonny: Ok, and is that easy to do?

Clare: Well you should just get in touch with them by their phone number, however you would contact them but you have to do that or else you are to have that tax charge. Now there’s another couple of scenarios when pension tax charges could apply. If you and your employer or anyone else paying pension contributions on your behalf, if more than £40,000 goes into your pensions and it might not just be as easy being £40,000 cash amount because it works differently for defined benefit schemes and then you’re exceeding something call the annual allowance. So that’s different from the money purchase annual allowance, this just the annual allowance and £40,000.

Jonny: They sound similar names.

Clare: They do sound similar and this one’s called the annual allowance. So it’s thinking about it on an annual basis is more than £40,000 going into your pension or you know as I say it’s worked out differently if it’s a defined benefit scheme. Now if you exceed that the same will happen, you’re going to end up with a tax charge which will effectively take off your tax relief. The other time there’s a tax charge is if you have pensions savings in your lifetime of almost £1,100,000 which sounds like a huge amount of money then you would also have a tax charge. Now, I think these won’t impact the majority of people so you know I think probably would rather get to Q&A it later than going into a lot of detail on this but if these things do apply to you then I would say that go to a financial adviser because sometimes even though there’s a tax charge its still worth staying in the pension. Now, if you know, often people sort of say well I don’t want a tax charge so come out of the pension, that’s a bit like me telling Royal London don’t pay me this month because I’m going to pay tax. If you end up with more money than even with a tax charge then it might be a good idea to stay in the scheme. And especially if you’re in one of these public sector scheme and our higher earner, then I think financial advice is really important to work out what the best solution is for you now people might have heard about these tax charges because they have been in the press a fair amount in relation to doctors.

Jonny: I think heard, yeah I don’t know much about it but I heard.

Clare: So there’s you know doctors are retiring early because they don’t want a lifetime allowance tax charge. They might have annual allowance in tax charges as well, but these don’t impact the majority of people but I think for most people in you know it won’t be an issue. But if they are an issue financial advice is key.

Jonny: So what’s next in the things we need to know?

Clare: So I’m afraid we’re going to get to the not so – I’m not saying tax is cheery – but the not-so-cheery part and we’re going to have a bit of a chat about death and tax.

It’s often said that there are two certainties in life and they are death and tax but tax on death isn’t always a certainty.

Jonny: So even when we die, we’re getting taxed?

Clare: Sometimes.

Jonny: Lovely that.

Clare: So in 2015, we had a change to pensions legislation and one of the changes that happened was that if you were in a defined contribution pension and you died and you were under 75 then there’s no income tax payable.

So if you’re in a defined benefit pension like Lily, you’re in the NHS and you die, then you pension will be taxable when say your spouse receives an income from that. If you’re in a defined contribution scheme so one of those pots of money and then on your death your beneficiaries can received that if you die and you’re under 75, and they won’t pay any income tax on it.

So say I died today and then my husband and my children could receive my pension pot, divided up between them and they could choose to take it either as all out as cash, some of it out as cash, they could buy an annuity with it or they could move into drawdown and they could take out money when they wanted any of those things. They wouldn’t pay income tax on it and just a bit of a reminder I spoke earlier about you have to be 55 to access pensions. If you receive a pension on the death of someone when then there are no age restrictions. So sometimes we see people stating that they would like their pension to go to their grandchildren, so you could have a five year old who is accessing that pension or their parent accessing on their behalf.

If I was over 75 when I died then my pension benefits would be taxable and again it’s about thinking about the planning, so say my husband was retired as well and he had a pension income of £20,000 a year and if he wanted let’s say for example I’ve got £200,000 when I die and I’ve never used any of my money and he said I’d quite like to take all of it at once. Well, that’s going to sit on tip of his income, so he’s going to have £220,000 of income that year and he’s going to pay a lot of tax. But if you moved it into a drawdown and said I’d actually you I’d quite like to take £15,000 out a year then that would sit on top of his income but be a basic rate taxpayer.

So again if you’re going to pay income tax it’s about thinking and you know, how to plan to pay the least tax possible and really so that’s the key point there.

Now I mentioned lifetime allowance is you know for people who’ve got big pots, it depends but there still might be a lifetime allowance tax charge on death that your beneficiaries would have to pay again if you’re someone who’s got a big pot of money then it’s worth getting financial advice about that just to see and I think just before we go to Q&As its worth mentioning inheritance tax in relation to pensions.
So pensions are normally inheritance tax free, and key point to find out if your pension is inheritance free but in most situations it will be. Now that’s a real benefit and that’s you know if you do have a lot of other assets and there’s going to be inheritance tax paid then having something that’s not subject to inheritance tax is good and so you know that’s important and what we’d normally say is it might be a good idea to use assets that are subject to inheritance tax so say money in bank accounts for example, stocks and shares to use them up first before you use money that’s not subject to inheritance tax.

Jonny: Ok, so we’ve learnt a lot there! I’m sure we’re going to have lots of questions. Yeah, so like you say we’re going to go to a Q&A in a minute but can we have a round of applause? I think that was brilliant! I’ve learned a lot there and I’m sure lots of people have got lots of questions coming in. Like I say we’re going to go to a Q&A now we’ll be back in 30 seconds and we’ll be ready to answer all your questions. We’ll see you in a moment.

Hello! We’re back, we’re back. So we’ve got lots of questions coming in and we’re excited to answer them. But before we get to them, we’re just going to have a recap on the slides. Will you be able to give us a little recap on I think Paul, could have a look at Paul and you can run us through that?

Clare: Yes, so I think it’s useful just to go over this because I realise there’s a lot to take in when we talk about pensions and tax. So this is looking at what is the best thing for Paul to do, Paul is still working and so he has a taxable income, he’s going to be paying income tax on that income but he wants to access some of his pension money and so this example is looking at if you wanted to take £25,000 tax free cash to pay for his kitchen. So, what’s the best way to do that? So if you took it as a cash lump sum then remember there’s two parts. So you have to take part that’s tax free with the part that’s taxable. So that whole £100,000 has to come out of the pension environment now that means you’ll get the £25,000 that he needs for his kitchen, but the other £75,000 well apart from you know it’s going to be sitting on his taxed income and he’s going to be paying a lot of tax and we spoke about emergency rate tax as well. He might get some of that back, but then it’s going to sit in his bank account if he doesn’t do anything with it. So its just kind of sitting not getting much interest, it’s not invested, you know I know one of the other sessions was talking about savings and investment and actually a lump sum like that sitting in a bank account it’s probably not the best idea. The other option is that he can take the £25,000 tax free but he can move the £75,000 with other 75% into drawdown, now that still sits in the pension environment and it’s in a pot, it’s invested and it’s hopefully going to grow and it’s there for him to take money out of whenever he wants to but when he’s still working it’s a really good option for him because it means that he’s not going to pay any additional tax. He’s still only going to have his earned income, now after this you know I kind of spoke about well what if he only need £10,000 and in that scenario he would only move £30,000 into drawdown and then leave the other £60,000 in his pension pot and that would hopefully grow and that would mean he would have 25% of a bigger number there then so it’s thinking about the options what’s best - the fact that if be took a cash lump sum he would trigger that money purchase annual allowance if he moved into drawdown because he’s not taking anymore income then he wouldn’t trigger that when he purchased annual allowance as well because Paul might still want to be paying into his pension.

Jonny: OK, so everyone ok with that we can talk about some more stuff is that ok? Is everyone ok with this slide? Great, great. So shall we start answering some questions now from people who are watching?

Lee: Yeah, let’s go to that. Thanks for all that Clare, it’s really good. Lots of good information there which we’ll definitely be watching back at some point when it’s back on the website.
So we’ll kick off with the most popular one, and this ones actually anonymous, but he’s been seeing a lot of people getting really big tax bills at age 75 due to pensions. So it’s a two-parter – why is this? And then B, is there a way to predict the amount or plan for it?

Clare: Ah, so this is a lifetime allowance question. And so  lifetime allowance is a bit complicated, but basically you would only have a tax charge at certain points and that’s when you take any pension money or when you die before age 75 or when you reach age 75. Now that is the last point in a defined contribution and the HMRC can tax you for lifetime allowance purposes. So we’re finding more and more people are being impacted by the lifetime allowance. That’s nearly 1.1 million, it’s £1,173,100 is the lifetime allowance now. It’s been frozen for five years and that’s why more people are being impacted by it because it’s being frozen and so at age 75 even if someone hasn’t taken any of their pension money then there’s test and basically if you’re over the lifetime allowance, so let’s say somebody had £1,500,000 then for the part that’s over the lifetime allowance there’ll be a tax charge and now if it’s not taken any money and then it’ll be 25% deducted. Now, you can choose to take that money out as cash that kind of excess out as cash and you would pay a 55% tax charge, but then you wouldn’t pay income tax on it if you pay the 25% tax charge then you pay income as well. So if you’re a higher rate taxpayer, it works out about the same, but for some people it’s kind of better. If you’ve already moved into drawdown then they look at the growth on drawdown and so that’s the difference between what went into your pots, so say £800,000 went into your drawdown pot and by the time you reach age 75 that’s grown to £1,100,000 then they would look at the £300,000 of growth.

Now you mentioned that there can be some planning so if you withdraw the growth in that scenario you could not have to pay the lifetime allowance charge at age 75 in your drawdown funds so if I was taking money out to live on every month then when they do this calculation instead of maybe having £1,000,000 I might only have £850,000. So I’ll have less of that tax charge. So I think that’s what that question is getting at, age 75 is one of those points where you will be assessed to see if you have exceeded the lifetime allowance.

So if you don’t know about it, then and you check your app for example, quite frequently to see how much is in your drawdown fund or then you might wonder where your 25% has gone and that’s because it’s up to your pension scheme to deduct that money and send it to HMRC. So that’s how that works, it is complicated now there’s lots of stuff and lifetime allowance, annual allowance on site like MoneyHelper. So there’s kind of more information on these but again, I would say that, you know good holistic financial advice on these especially these kind of complex topics is invaluable.

Jonny: Yeah, it’s quite a shock if you look at your app and yeah that money’s gone.

Clare: Yeah, congratulations, happy birthday!

Jonny: Yeah. Lee?

Lee: Yeah, thanks for that one Clare. The next one comes from Ross, the next most popular one. So he has a mixture of pensions both DB and DC and he’s wondering how it’s best to take his 25% tax free. Can you take one out of the DC at 55 and leave the others till maybe 60 and can he also continue paying into his DC pension if he was just to choose the DB option?

Clare: So yeah, if he’s not stopping work, and he’s still working, then you know he won’t want to start taking his defined benefit and benefits because you know you wait until you’ve stopped working for them. He can take it out – doesn’t matter how many pots you have – say you’ve got kind of four different pots and defined contribution money you can take 25% out from each of them if you want, it’s up to you and the problem would be is you know that money purchase annual allowance. So if he still wants to make pension contributions then if he wants to take money out of his pension then just kind of take that 25% tax free cash and then move it into drawdown, that’s the way to not have the money purchase annual allowance applied, but it depends if he’s paying less than £4,000 a year that you know it’s not going to affect him as much but you can choose the order of how you take benefits. Some people might never take their pension benefits because and perhaps you’ve got a DB scheme and it’s got that good guaranteed income but you’ve got a bit of a DC pot of money, you might just decide actually I’d like to pass that on to my children or my grandchildren and so you might never use that pot of money because you know it’s so good kind of inheritance tax-friendly way to pass money onto your beneficiaries. So there are choices available.

Jonny: Ok, Lee how we doing for questions?

Lee: Doing well, so the next one comes from Peter and it’s leap-frogging it’s making its way back up to the top – is it better to do a monthly or an annual drawdown and maybe the kind of tax implications of such a thing?

Clare: Because it’s taxed like income I support it depends how much you’re taking and what’s it for? So maybe someone wants to take an annual amount because they use it for an annual holiday. So perhaps they’ve got another pot of money and perhaps some people do a mixture of DB and DC so they have defined benefit and that’s the amount that kind of you know we get every month and they just like to take out the money annually to pay for a holiday or something like that. Well, you know if you take it out monthly then you’re not going to have the emergency rate tax issue, whereas if you take out in kind of lump sums then that’s the problem because you know the tax system thinks that you’re going to be taking that out every month. And it works a bit like you know again salary we mentioned earlier that you know the tax system will adjust itself quite quickly. We have kind of real time reporting, so we can you know get around that but I think often for people it works out taking kind of a smaller amount monthly. But you know it depends what your tax position is. It depends how much you’re going to take out annually, I think is the answer to that.

Jonny: It’s quite hard to tell people what to do and there’s so many variants isn’t there? And so many people are different with their situation.
Ok, Lee back to you my friend.

Lee: Ok so this one comes from another anonymous, not got anyone for this. So if you’re in the 40% tax bracket, so one of the higher ones, is it worth paying more into your pension now, this person has maxed out their employer contributions and has a larger pot and at the end where they’re less likely to pay the 40% tax bracket?

Clare: Yes, you know one of the best positions to be in is if you get 40% tax relief on the way, but you only pay 20% basic way on the way out. So that is kind of, there’s a real sweet spot there, that actually you should be paying kind of more contributions in, if we think about that £100 example, then you‘re going to pay £60, have a £100 going in and you know an employer contribution possibly, but there’s going to be you know it costs you £60.

Jonny: Can we put that example back on the screen, full again while you’re saying this.

Clare: So I think yeah, but when we think about taking money out of a pension, so the same person if they’re a basic rate taxpayer when they take out, they’ll actually get £75 out of £100 now that’s because you get £25 tax free and then you’re going to pay 20% on the £75 that’s left. So if it’s cost you £60 going in but you’re going to see £75 of it coming out then that’s a really good place to be and actually I saw a stat a while ago that said six out of seven higher rate taxpayers are basic tax rate payers when they retire. So if you’re in the position on the right then it’s cost you £60 to get £100. But when you take money out of a pension and you’re a basic rate taxpayer then you’re going to get £25 tax free, and you’re going to have £75 which will be taxed at 20% and so you know that’s a really good place to be, so you’re going to see £75 out of £100.

Jonny: Ok Lee, back to you.

Lee: Yeah, another one from Peter is I don’t know if it’s the same Peter, he’s obviously good at asking questions.

Clare: Sorry can I just interrupt, I realised I made a calculation mistake, it should be £85 out of £100 so it’s even better. There’ll be people going she’s not counting very well there.

Jonny: Hey, you’re telling us a lot here, you’re doing a great job.

Clare: So you pay £60 on the way in, you would see £85 on the way out of £100.

Jonny: Ok brilliant, so Peter he’s back.

Lee: Yeah he’s come back, maybe not the same one. I think it’s something that a lot of people have been asking if we could just do a sort of high level recap of the lifetime allowance because it’s quite confusing and there’s a lot of people looking for a little bit of help with that.

Clare: Yeah, so the lifetime allowance is the amount you’d have over your whole lifetime and so it’s currently £1,073,100 and that’s kind of pension savings for all of your lifetime. And if you exceed the lifetime allowance then a tax charge applies. Now, they work out that tax charge at different points in time. So it would only be if you take any pension benefits, so that’s whether you take it as a cash lump sum, drawdown, you buy an annuity, you start your defined benefit pension, any of these things or you reach age 75 or you die. So those are the main times when it would be tested against the lifetime allowance. And if you exceed it then a tax charge will be applied. So there’s two ways to pay that tax charge, either you take it as income, it’s added to your income and you pay a 25% tax charge of the amount over the lifetime allowance or you pay a 55% tax charge but then there’s no further income tax to pay. So you just get that money out and it does seem a lot, it’s quite a lot of money but because you’re not paying any income tax on it, you know, if you’re a basic rate taxpayer you’re better with that 25% tax charge, if you’re a higher rate taxpayer and it works out the same either way if you’re an additional rate taxpayer the 55% tax charge works out there. So only if you exceed your lifetime allowance will you pay these charges, so that’s what’s really crucial and it’s worked out differently, it’s easy in defined contribution schemes because you can look up or add up the different pots of money or if someone has one pension you can see what that’s worth. And so there’s different points it’s tested.

Jonny: It is a complex thing, isn’t it? And you said on MoneyHelper they’ve got even further information.

Clare: So there’s more information and I think on you know and I talk a lot about things like lifetime allowance and annual allowance and I speak to financial advisers about these things. These are complex topics and when we think about some of the issues that are happening and we’ve mentioned the doctors working out well is it actually worth having a tax charge? Should we not be paying a tax charge? And it make it even more complicated and that’s why I think if you sit down with someone and they’re going through all your numbers on a personal basis, it almost feels like there’s cost but actually that can save you a lot of money in the long-term.

Jonny: Hope that helped Peter with that, please let us know Peter if it did. Ok Lee?

Lee: Jumped to another one now, this is a good one from Malcolm. So he plans to retire at 65 next October, would it better to retire closer to the beginning of the tax year? So anybody coming up to retirement, will that make much of a difference?

Clare: Not if he’s taking a regular amount of income because all it’s going to happen is he’s stopping work, which it sounds like he’s actually stopping work then his pension income will, it just works like pay, the pension provider will have a tax code for him. So they’ll apply that tax code and he’ll get charged for that. It depends if he’s taking more than his tax free cash though, and he’s taking one of these, say he’s moving some money into drawdown, but you want some more of that drawdown income, then it might work out better and also depends what other things does he have in the tax year, does he have any other investments? Does that help? So normally being at the beginning of the tax year it can be good for some things but if he’s just taking tax free cash and taking a regular amount of income which is going to happen every month then it’s not as important. I suppose the only thing is that if he waited until after the tax year, say he starts in April that’s when he retires then he’s got that presumably lower amount of money than his salary was and I mean it might make a difference in some scenarios. But again it’s kind of you need to sort of work out the numbers and see what happens if he was a higher rate taxpayer, a basic rate taxpayer – how’s it going to work?

Jonny: Hope that helped Malcom. Lee?

Lee: Cool, we’ll jump to well quite a few people asking about they‘re in the fortunate position where they have a DB and DC pension and they‘re wondering about the kind of tax free cash element. Is there anything to think about there in terms of where they take it from or where’s best maybe to take it from first?

Clare: Yeah, I mean, it’s a tricky one because people often want that tax free cash element and my husband’s a public sector worker and we’re kind of talking about the fact that actually him not taking his tax free cash for example and taking a higher amount of monthly income would be a good thing because that monthly income is guaranteed for life and will go up every year and then we take more cash out of my pension and so it can be a good idea. Because that DB income is guaranteed for all of your life and then your spouse or partner could be entitled to it after your death as well and then taking a higher income from that can make a lot of sense, but it depends if people want a lump sum. It’s kind of a choice thing and you know personally I think it’s better to probably take more out of your DC pot and then because that is such a valuable guaranteed income you’re going to have in retirement. That promise has been made, its going to be paid throughout.

Jonny: Having that mix seems quite nice really, knowing where you’re going to be every month, making that plan.

Clare: Yeah, I mentioned my husband, couples need to talk about these types of thing and you have to look at your finances as a couple. So we look at the fact he has a guaranteed income that will cover our basic expenditure when we retire, and we used the PLSA retirement living standards, they’re great because they give you an idea for actually you’ll to have a minimum, moderate and comfortable retirement. The living standards are great because sometimes people don’t know how much will I need in retirement? So I think this gives a good idea.

Jonny: So if you go to the website here, they’ve got a really good chart where you can put single or couple and its got a big table and it sort of gives you a minimum, moderate and all the different factors. So I really like that when you’re making a plan go to that website.

Clare: So we’ve talked about that, we looked at what he’ll have and that’s guaranteed income. I’ve got a tiny bit of a DB pension from my very first job so we’ve got that and then we look at well actually we can take money out when we need it from my other fund from working for different companies. I think you look at that on a couple basis and it’s good to think about actually especially when you’re a bit further from retirement to think about actually what do I want my retirement to look like? How much money am I going to have in retirement? Because we need to do that because well actually how long will I have to work?

Jonny: It’s a hard thing to do isn’t it, picture what you want in retirement when you’re a bit far away, but I think having the flexibility and freedom of making them choices like you don’t have to work if you don’t want to, is key isn’t it.

Clare: Yes, and I think often what we’ve done is look at other generations and thought well they’ve had a great retirement, I mentioned my grandparents and they had really good pensions, but not as many people have defined benefit pensions anymore. So if people do have them that is really a valuable benefit and if you don’t have any defined benefit pensions then you have to make sure that that money is going to last for your retirement. We know that a lot of people are underestimating how much they’ll need in retirement and how long they might live, people often underestimate their longevity not in my family we don’t, because we have such long livers, but I think it’s something we need to think about because its become more common to live to 100, what type of retirement do we want?

Jonny: Brilliant, brilliant. Ok, so Lee how long we got? Have we got enough time? We’ve got five minutes left.

Lee: Ok we’ll try and rattle through.

Jonny: Ok good, because we want to make sure we get to people’s questions.

Lee: So we’ve got a couple of people in the call, this one’s anonymous, but there’s a couple of people in the call who are self-employed and we spoke about some of the benefits with having an employer in terms of salary sacrifice and stuff like that. What’s the best thing for them to do and thinking about saving into their pension and the kind of tax implications of that?

Clare: Ok, so it depends again everything about pension tax planning depends. So some self-employed people are sole traders. If you’re a sole trader then you’ll be paying income tax and some self-employed people have a limited company. So you maybe might just be a one person company there might be a few people you’ve got limited company. Now they it kind of works differently, they wouldn’t have, as an employer you’ve got your director hat on as an employer and as an employee, you might be both of those people and then you’ll have corporation tax relief. So it means that when you’re thinking about in kind of profits and things like that when actually before even profits, pension contributions get to come out and you know you get tax relief on that corporation tax is going up again and you know actually paying less corporation tax is going to be a good thing. So I think if you are in the position where you’re self-employed, pension contributions are still a good thing, if you’re a sole trader and it’s income tax relief then it’s just going to be making an individual contribution for yourself. You’re still going to get tax relief but you’re not going to see an employer contribution. If you are set up as a limited company then you can be making an employer contribution and you can be making an employee contribution for yourself essentially. So you receive corporation tax relief and often people talk about how should someone who’s a company director and take money out of the company and it used to be that salary and dividends, so you take a small amount of salary to make sure that you received all of your benefits, National Insurance credits these kind of things, then you would take out the most in dividends, but the taxation of dividends changed a few years ago and it’s not very tax effective so actually a combination of salary, dividends and pension contributions is a really good thing because you’re going to see corporation tax relief on that and you’re going to be paying into a pension and that’s a good place to be, so there’s definitely still a benefit. If you are self-employed, you’re a director the difference is if you’re a sole trader then you’re paying income tax, there’s still a benefit because you’re going to see tax relief.

Lee: That’s great, so we’ll jump straight into the next one, so this one comes from Mark Seaman – will the lifetime allowance limit be unfrozen in future years?

Clare: So, when the then Chancellor in April 2021, now the Prime Minister announced that it was going to be frozen, it was to be frozen for five fiscal years, so that takes us up a few years. We’re hoping it’ll be unfrozen at that point in time, it is making quite a big difference and there are people being impacted by the lifetime allowance now that wouldn’t have been impacted. So I would hope that that does happen whether it will or not I don’t know, it’s a crystal ball situation isn’t it?

There’s a lot of revenue coming from lifetime allowance tax charges so it’s one of these things that if money’s being made we’re going to have some tax holes to fill, you can see why they say these people actually have a lot of money in pensions.

Jonny: We’ve just got the two minute warning I think Rick was saying two minute left. So shall we do one more question? Lee are we ok for one more question?

Lee: Yes, let’s go for one more and I’m going to get accused of playing favourites here, but it’s been upvoted it’s Peter, I’m assuming a different Peter – I’m hoping if my pot grows to one million do I need to stop the pot growing?

Clare: Well again it depends, if that’s the pot of money before taking any pension benefits. So say Peter hasn’t taken any pension benefits and he has £1,000,000 and he’s thinking about getting close to the lifetime allowance. Now if he has the benefit of still working for example and he has employer contributions and he’s making contributions then when you run the numbers often it still makes sense to keep paying even if you have a tax charge and it goes over that million. But as I said, it’s one of these things people don’t want to have a tax charge but it’s about working out will you still be better off with the tax charge? If he’s already moved money into drawdown, so say that money is in drawdown, then it’ll only the growth that will be tested. So it’ll be the difference, like the example I gave of £800,000 moved into drawdown and it’s grown to £1,000,000 and he’s getting closer to age 75 where there’s going to be one of those tests then it might be worth withdrawing some of that growth but if its just going to sit in a bank account not doing anything waiting for potentially inheritance tax maybe then that might be not a good idea, but if its was say inheritance tax was an issue if you did give something with it perhaps gave it away to your family or actually you can make pension contributions for your grandchildren, I spoke about the fact that even if you’re not earning you can have £2,880 go into a pension every year, it’s topped up to £3,600 so actually if that was going to happen you could be withdrawing the growth and you will pay income tax when you withdraw but if it’s for the benefit of others that you think that that’s going to be a good way to look after your family it‘s going to mean you won‘t have there won’t be as much inheritance tax to pay that could be a really good solution. It’s a tricky one, taking out some of the growth could be a good thing if he’s not taking any of the pots and then its about working out does he have employer contributions, you have to work out what’s the position I’ll be in even with the tax charge compared to if I stop making contributions now and my employer stopped making contributions, where would I be?

Jonny: Tricky question to answer, but I think you did a brilliant job with that. OK, so that’s the end of this show, we’ve loved you all coming today, I hope you found that useful, I certainly did, I know Lee did, he’s going to be looking at this on the catch up session, which you can all do if you didn’t get chance to watch all this, if you go to Pension Awareness Day website and check out the shows you’ve missed, but we’ve also got another seven shows left this week, so if you haven’t signed up to make sure you go to the website and we’ve got some more shows coming to you.

Clare big round of applause for Clare! Thank you Clare, you’ve been brilliant. Thank you for joining and we’ll see you soon, bye!