What To Do When Retiring Soon
Published / Last Updated on 01/12/2014
Video offers action tips if you are retiring soon for state pension, winter fuel, tax codes and dealing with HMRC and DWP.
Transcript:
“Hello there, so you're about to retire. What to do when you're about to retire? This video will just give some basic insights for you, really a checklist of things for you to do.
So first things first, for your state pension the Department for Work and Pensions (DWP), “The Pensions Agency” they will write to you usually four months before you're due to reach your state pension age. So four months before you’re due to retire you’ll receive notification from the Department for Work and Pensions. Now, if you do nothing then you won't get your state pension. You have to claim your state pension, so when you receive that notification you must contact them and claim your state pension. [And] you can usually do that by telephone and there’ll be telephone numbers on the documentation that you receive.
Now, you may also have other pension arrangements: company pension schemes, private pension schemes, you may be thinking about: “well do I buy an annuity with my private pensions or do I knew use the new flexible drawdown rules?” With flexible drawdown and annuities you have a right to an open market option, so I think there you’ll need to get professional advice from a financial adviser, ideally an independent financial adviser to search the whole pensions market for you.
Now, let's assume you've done that so:
- You put in a claim for your state pension
- You’re working with a financial adviser or you're working with your pensions company to decide on what’s the best route for you to draw your company pension benefits or your private pension benefits
Now, other things they may need to think about:
If you are a pensioner or you’re on low income and things like that, there are other things apart from your bus pass and things: there’s the winter fuel allowance, there’s pension credit if you are on a low pension income, so you'll need to talk to HMRC and the Department for Work and Pensions about benefits and tax credits and things like that.
[And] then I suppose, moving this on, I think this is a little bit of a trick here: what used to happen was when you were approaching retirement or at retirement you would also receive a form called a P161 and I call it “the nosy form”, the nosy form where you're about to claim your state pension but then what you also asked about is what about other pension rights you have etc. Now the P161 has been withdrawn so: how does he HMRC know about you, know about your tax code and know about other pension arrangements that you have?
So let’s talk this through. At the time of shooting this video it is now December 2014 the personal allowance for most people is £10,000, that’s the amount of income that you can receive before you pay tax and then for certain categories of pensioner you may have a higher personal allowance. Now just keep it very simple for today, let's assume you have a personal allowance of £10,000. [Now] when you start to draw your state pension, that may vary depending upon the service that you’ve done, the amount of National Insurance contributions that you paid in.
But let's assume you’ve got a state pension entitlement of £7,500 per annum now the way HMRC work’s is: your state pension is technically taxable, so it is taxable income and the way HMRC works is: let's assume you’ve got your personal allowance of £10,000 or, on your tax code slips it will just show as a tax code of 1,000 or 1,050 if you’ve got the higher one at £10,500 etc. But let's keep it simple and say £10,000 allowance: what they then do is they knock off your state pension, let's assume your state pension like I said: £7,500 a year. So you’ve used up a lot of your personal allowance with your state pension: so it started a £10,000, you're drawing a state pension of £7,500, so the balance of allowance remaining is £2,500 or in tax code terms, a tax code of 250.
Now, with your company pensions or when you start to take your private pensions, whether it's annuity or drawdown, your employer, your pension company, your annuity company or drawdown company, they are all supposed to notify HMRC that you are receiving a pension from them. Now what they will all do is they will make an assumption that you are going to be taxed at least basic rate tax, so if you do nothing, if you tell nobody then you will get 20% tax deducted at source from your pension schemes. But in the example earlier you still have some personal allowance left £10,000 less a state pension £7,500, still £2,500 off unused tax allowance. Now without HMRC knowing, they won't then allocate that as a tax code to your other pensions. So my guidance here is: when you're dealing with HMRC, when you are at retirement or just about retire and you know what you're going to do with your pensions, telephone HMRC and tell them exactly what you are doing and exactly what you will get. Now I’ve just made a note of the telephone number that's currently live and they’re very helpful at HMRC. Their telephone number is 0300 200 3300 so that’s 0300 200 3300 that’s the number correct as at the time of shooting this video.
[But] without HMRC knowing that you've got these other pensions it may be that your overpaying tax because you haven't used up this unused allowance or what if your pension company or your employer hasn’t written to HMRC? What if they haven't tied it up yet so that they know it’s you. So the guidance here is:
- You have to claim your state pension
- Make sure you're claiming the right entitlements that you have whether it is winter fuel allowance, whether it pension credit if your low income et cetera and then the final part is
- The bit which does get tricky, unless we get it right, is the tax codes. Most of your tax code will be used up by what you're receiving in state pension but then any unused allowance that then is issued as a tax code to your company pension schemes or your private pension schemes, be it annuity or drawdown, and what they will usually do is they will allocate all of that tax code to your biggest private pension income, company pension or final salary or whatever and then if there’s still some left over, they will allocate it to the next pension etc.
- But if you do nothing, if they don't know, it could be that you are paying tax on your pensions and you’re not using all of your personal allowance up.
Now HMRC will sort that out if something did go wrong and they didn't know because you won't pay tax where it wasn't due but all I'm trying to do here is a pre-emptive strike. To say: “right let's get this organised, right at or just before you retire”.
So think about it claim your benefits, claim your state pension etc. and with your private pension income from company pensions and personal pensions and all those sorts of things, then once you know what you’re doing tell HMRC exactly what you’ve got, what the reference numbers are etc. and then what they will then do is automatically allocate any balance of tax code, any balance of tax allowance that you have remaining.
As ever, with what to do at retirement, we only do it once so it can be a scary thing and it's not something that people do every day, so it just may be that you contact me, take some professional advice, make sure you doing the right thing and if all else fails pick up the phone and speak to the Department for Work and Pensions, the Pensions Agency about the state pension and definitely speak to HMRC and tell them exactly what other pension schemes you have. Thanks very much for watching.”
