Tax Systems Share Discussion Threads

[badtime] 22/3/2014 20:10

pity that eh Smarm :)

[miata] 22/3/2014 19:44

Extensive Standard Life Q&A blog on the changes:

[smarm] 22/3/2014 19:13

Miata - re grabbing pot - when I posted I had forgotten about the marginal tax rate!! Doh.

[miata] 22/3/2014 17:14

I doubt it (my expertise covers tax but not pensions), but here are a few relevant snippets:

Legislation will be introduced in Finance Bill 2014 to amend FA 2004 to:
• allow members over 60, with total pension savings of £30,000 or less to take out all of those savings as one or more trivial commutation lump sums.

The rise in the trivial commutation limit applies to all commutation periods starting on or after 27 March 2014. The rise in the amount that can be taken as a taxed lump sum from other small pension pots, and the number that can be taken, applies to all payments made on or after 27 March 2014.

The current (22nd March) trivial commutation lump sum limit is £18,000.

The detail (not in words of one syllable I'm afraid) is in The Registered Pension Schemes (Authorised Payments) Regulations 2009 (SI 2009/1171).

[obbig60] 22/3/2014 16:48

Can anyone explain to me in words of one syllable how the trivial commutation rules will change after march 27th. I am over retirement age and at the moment I have a pension from my former employer and also a state pension. However I also have a small private pension, worth about £15K, which I have never converted to an annuity, because I was hoping the annuity rates might improve if I waited. It would seem that after April 2015 I could take this as a cash lump sum (with tax on 3/4 of it) but would I be able to do the same after March 27th this year or would the other pensions I have which are already in payment block this option? Any advice would be much appreciated.

[miata] 22/3/2014 12:53

x+y


You can take your pension from age 55. When you do so, you can have 25 per cent tax-free. For someone with a hefty £150,000 pot, that would be £37,500 in cash. The rest is then taxed as normal income - so, at 20 per cent, 40 per cent or 45 per cent, depending on how much you have. If the same retiree cashes in the remaining £112,500 of their pension? The simple answer is that (using this year's tax allowances) they would be hit with a £40,500 bill, leaving them with about £77,000 worth of pension. Not only would they pay 40p tax on most of their pot, but they would lose most of their tax-free personal allowance because this is reduced once you earn more than £100,000 in a year. However, if they took £10,000 from their pension every year, they would pay only about £11,000 in total (assuming they made no investment profits). The key for wealthier savers is to keep the amount they take out of a pension below the 40p tax threshold - from April, £41,865.

[goatherd] 22/3/2014 12:00

Miata,

New rules - Suppose one is withdrawing "x" from a pension pot and it is liable to be taxed at "marginal rate". Is that the marginal rate on income "y"; or on "x +y"?

[miata] 22/3/2014 11:21

Some drawbacks:
- DB scheme probably has index-linking and rate of return higher than anything available on the market (meaning you should ultimately get more by leaving it there)
- The transfer value is likely to be lower than you should reasonably expect
- Your DB scheme rules may have clauses that affect your proposed scheme

None the less interesting.

[extrader] 22/3/2014 11:11

Hi all,

Suppose you're in your late 50's in a DB pension scheme projected to pay out , say £ 30,000 p.a. from age 65.
And suppose (at 4 %) your employer has set aside an actuarially-approved 'pot' that will be worth £ 750,000 at age 65.
With the proposed changes, might it not make sense to 'arrange' to take early retirement and commute your rights into a pot worth, say, £ 700,000 at 62 or 63?

You'd then have a substantial nest egg under your control, to disburse as suited your needs/lifestyle/expectations rather than a 'capped' £30 K.

I could see this being pretty unwelcome to underfunded/barely funded pension schemes, if the new system could be 'gamed' in this way.....

ATB

[miata] 22/3/2014 10:19

Notes on the change to the taxation of savings income

10% rate replaced with 0% rate on £5,000

Other income (eg salary, rents, pensions, etc) is taxed first
Savings income is taxed next
Dividend income is taxed last

If taxable non-savings income in a year is less than the starting rate limit, this savings income will be taxable at the starting rate (0% from 2015-16), up to the starting rate limit (£5,000 non-indexable from 2015-16).

So, from 2015-16, someone reliant solely on interest income could receive £15,500 without being taxed.


Section 852 of ITA 2007 will be updated to allow regulations to provide that deduction of sums representing income tax on interest payments will not be required where a saver provides a certificate declaring they are unlikely to be liable to pay income tax on their savings income for the year. At present they have to confirm they are unlikely to be liable to pay any income tax for the year. The new text will mean many more get interest paid without deduction of tax.

[badtime] 22/3/2014 10:17

Well i imagine that uplift to 150% is a surprise anyway...wasnt long ago that they were talking about reducing it to 100%

[skyship] 22/3/2014 10:02

MIATA - Thnx for that.

BT - yes my review is in 2weeks time - so that 150% will apply then.

Should I want to withdraw more, then it seems I should be able to do so after Apr'15. In reality I won't do so unless I need urgent cash for something or other...

[badtime] 22/3/2014 09:44

Sky i confirmed yesterday with sippdeal re taking anything you like ...but as MIATA points out it could push you into a different tax bracket if not handled carefully

Note..but obviously if you haven't been paid for this year and i believe you are due a review then yu will hav that uplift re 150% GAD

[miata] 22/3/2014 09:38

- Legislation will be introduced in Finance Bill 2014 to:
reduce the minimum income requirement for accessing flexible drawdown to
£12,000;
- increase the capped drawdown limit to 150% of an equivalent annuity;
- increase the total pension wealth that people can have before they are no
longer entitled to receive lump sums under trivial commutation rules to
£30,000;
- increase the small pots limit, raising the size of a pension pot that can be
taken as a lump sum regardless of total pension wealth, to £10,000;
3
- increase the number of small personal pension pots that can be taken as a
lump sum to three.
These changes will have effect from 27 March 2014.
----------------------------------------------------------------------------------
Future Tax Changes

Pensions tax: abolish the age 75 rule – The Government will explore with
interested parties whether those tax rules, that prevent individuals aged 75 and over
from claiming tax relief on their pension contributions, should be amended or
abolished.

Increased pension flexibility – Legislation will be introduced in a future bill
to allow those with defined contribution pension savings to draw down from them
from age 55 from April 2015, subject to their marginal rate of income tax and their
pension scheme rules. The Government will consult on how best to implement this.
The Government will also consult on increasing the minimum pension age so that it
remains ten years below state pension age, for which legislation will also be in a
future bill.
------------------------------------------------------------------------------------------



In future it appears people will be able to withdraw anything they want, though they will be taxed on it at whatever marginal rate the inclusion of the amount withdrawn takes them up to.

So it might be reasonable tax planning for a poor taxpayer who had other pensions yet to come into payment (perhaps retired at 55 and had a former company pension to be received from 65) to withdraw funds up to his personal allowance or perhaps up to the higher rate threshold. To withdraw the entirety and pay 40% or even higher rate tax on it would not seem sensible.

Caveat - early days regarding the small print of these changes.

[skyship] 22/3/2014 09:03

MIATA - A rather big question...

I am in Income Drawdown from my SIPP and have been since 2003.

I am 65 and draw my max of 7%pa at the 120% GAD rate.

All other things being equal (Age, annuity rates & Fund sum); does the lift to 150% mean an available 25% hike in my drawdown max, ie from 7% to 8.75%?

Or could I actually drawdown anything I want ..... though I wouldn't!

[jeffian] 21/3/2014 22:54

I have to say that for old fogeys at, or close to, retirement, you've got to love this Budget. I now live off investment income and am in the happy position of qualifying for flexible drawdown. The increased NISA allowance is great - every year asap after 5/4 I b&b the maximum possible equities from outside to inside ISA; I benefit from the abolition of the 10% savings rate; I've now just remembered that the wife has a small Stakeholder Pension which I told her to draw down after she inherited my annuity when I snuff it, but she'll now be able to draw down the lot (basic rate taxpayer). Nice one, George!

[miata] 21/3/2014 14:56

If you are a basic rate taxpayer, no, if you are a higher rate (40%) taxpayer you are liable to pay the excess.

[dgo] 21/3/2014 14:47

Thanks for your help MIATA
I receive £9K dividend per year from NG. which is not in an ISA so am I liable for income tax on that amount ?

[miata] 21/3/2014 14:37

Good question. In effect the answer is yes they are taxed, the reality is more complex.

Regardless of whether shares are inside or outside an ISA the dividend payments are the same.

The benefits of an ISA are no capital gains tax (but no allowance for losses) and gross income from bonds (eg TR25).

From the HMRC website:
" You can't claim the 10 per cent tax credit, even if your taxable income is less than your Personal Allowance and you don't pay tax. This is because Income Tax hasn't been deducted from the dividend paid to you - you have simply been given a 10 per cent credit against any Income Tax due."

The point is that following the abolition of ACT many years ago, income tax is not deducted from share dividends. However as dividends are paid out from earnings which have (usually) suffered Corporation Tax, to prevent income being taxed twice a credit is given to persons to offset basic rate income tax.

It was all part of the sophistry by Gordon Brown to reduce the amount repaid to overseas investors from 20% to 10%.

[dgo] 21/3/2014 14:24

Could anyone help me here please, are dividends payed from shares within an ISA
completely free of tax or are they still taxed at source at the standard rate.
Thanks

[miata] 21/3/2014 09:12

Why would one want to grab one's pot incurring tax at one's marginal rate on it?

[smarm] 21/3/2014 09:05

Skyship - I have a year to wait but it is a little vexing. I have a strategy for how to trade my SIPP and ISA and this throws things up in the air a little.

My review occurs in March 2015..so I'm not sure when the new rules will apply to me. I suspect I may be forced to wait another tax year to grab my pot.

We'll see.

S

[skyship] 21/3/2014 08:52

Ah - no, of course I know of the varying age and interest rate elements, I thought you were referring to the fixed (though recently variable) GAD multiplier.

My Triennial Review comes up in 2weeks time; and until this week's great news I was anticipating a c10% drawdown reduction even though that most important element, the Fund Value, is practically unchanged. Now I have a welcome decision to make!

Will post something else on the usual NT site today - re CCSL...

[smarm] 21/3/2014 08:29

Skyship - yep...vast improvement....just 16% down. I wonder whether the tables have been updated post budget. Mind you.....5 years on and taking inflation into account....it doesn't make happy reading.

S

[smarm] 21/3/2014 08:24

skyship - the gad rate changes every month...it's driven by the 15 year gilt rate and one's age. The last time I looked I was due to take a 40% hit (assuming capital same) but looking again I see things have improved.

S