Future taxes

I've kind of mentioned this in the past, but wouldn't mind if someone told me I'm making a big mistake with my thinking....

1. The last few years my income has been high from moving my retirement savings out of my Govt account and moving it over to the UK. I've been using my wife to help out with some of the US taxes on that money.
2. Planning on taking my wife off my US taxes for this current tax year. At this point the only incoming money is my pension which is about $16,000 and a little bit of interest on bank accounts here in the UK....another $2,000 or so at this time.....although I'd like to think the interest rates will be heading back up soon.
3. By doing so, my wife can start taking her pensions here in the UK without paying US taxes. She will be staying under the £12570 limit here in the UK.

We are trying to simplify our bank accounts and taxes. By starting the process of emptying a pension/divorce account now, I think she is able to take 25% of that out now without worrying about taxes here...and can probably take out a further £5,000 a year for about 10 years to empty that account and stay under the tax liimit. We are starting to dump some money to my wife's kids and it seems to us that if something happens to us it will make it easier for them to get their hands on our money if it is in fewer financial accounts. We've spent the last couple of years with my wife's parents in a care home and watching their savings go poof.

I can see no problems with your plan. Looks to me like you are handling things very well.

As an additional question......

As part of my wife's divorce, she received about £20K which she put into a very safe fund through Standard Life (the one we are wanting to start emptying). Over the last 20 years it is now about £65K. If I understand the rules.....

1. She can take out 25% with no tax hit at all. Is this on the original amount of money or what is worth at this time?
2. If she were to take out the 25% now, would she then be able to take out another £10-12,000 which would keep her safely under the tax free personal allowance? Or would that 25% somehow "count" in her total income for the year?

As an additional question......

As part of my wife's divorce, she received about £20K which she put into a very safe fund through Standard Life (the one we are wanting to start emptying). Over the last 20 years it is now about £65K. If I understand the rules.....

1. She can take out 25% with no tax hit at all. Is this on the original amount of money or what is worth at this time?
2. If she were to take out the 25% now, would she then be able to take out another £10-12,000 which would keep her safely under the tax free personal allowance? Or would that 25% somehow "count" in her total income for the year?

No idea on that I’m afraid. Hopefully someone will come along who knows this stuff.

Luckily, the lady I was talking to about my self assessment was happy to help with my wife's pension question. Even more confusing than the self assessment question. We went back and forth for a good while before it finally clicked what she was talking about. On the Govt site it states the following.

Lump sums from your pension

You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. The tax-free lump sum doesn’t affect your Personal Allowance.

Tax is taken off the remaining amount before you get it.

Example:

Your whole pension is worth £60,000. You take £15,000 tax-free. Your pension provider takes tax off the remaining £45,000.

My plan was to take the 25% tax free (£17,000) out my wife's pension now and then next year start taking smaller amounts to stay under the tax threshold. IFFFF I finally understood her correctly, That 25% was only if you took the whole shebang out.....the first 25% would be tax free but then you would be taxed to hell on the rest of it. Evidently NOTHING happens over the £12570 threshold without getting taxed. So, since she has gotten a couple thousand from interest this year we can take out maybe £8-9,000 to be safe and then less in the following years. Iffff she starts getting the spousal SS this next summer we will have to be really careful to stay under the threshold. In another 5 years I think she will go over the threshold anyway....so we might just take out more and pay the tax.

Luckily, the lady I was talking to about my self assessment was happy to help with my wife's pension question. Even more confusing than the self assessment question. We went back and forth for a good while before it finally clicked what she was talking about. On the Govt site it states the following.

Lump sums from your pension

You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. The tax-free lump sum doesn’t affect your Personal Allowance.

Tax is taken off the remaining amount before you get it.

Example:

Your whole pension is worth £60,000. You take £15,000 tax-free. Your pension provider takes tax off the remaining £45,000.

My plan was to take the 25% tax free (£17,000) out my wife's pension now and then next year start taking smaller amounts to stay under the tax threshold. IFFFF I finally understood her correctly, That 25% was only if you took the whole shebang out.....the first 25% would be tax free but then you would be taxed to hell on the rest of it. Evidently NOTHING happens over the £12570 threshold without getting taxed. So, since she has gotten a couple thousand from interest this year we can take out maybe £8-9,000 to be safe and then less in the following years. Iffff she starts getting the spousal SS this next summer we will have to be really careful to stay under the threshold. In another 5 years I think she will go over the threshold anyway....so we might just take out more and pay the tax.

Be careful. Because of how you described the investment, I don't actually think it is a pension even though you may think of it in that way. Pensions are very specific and are different to other kinds of investments.

As an additional question......

As part of my wife's divorce, she received about £20K which she put into a very safe fund through Standard Life (the one we are wanting to start emptying). Over the last 20 years it is now about £65K. If I understand the rules.....

Be careful. Because of how you described the investment, I don't actually think it is a pension even though you may think of it in that way. Pensions are very specific and are different to other kinds of investments.

I specifically asked her to clarify this. Pension. She wasn't able to touch it until after 55 and since we didn't need the money we are just now thinking about what to do with it.

and.......since this 25% tax free rule is kind of worthless for us.....we will just treat the money like any other investment and just take what we want once a year and try to stay under the tax threshold. In a couple of years we might just say "bugger it" and take a bit more and just deal with paying a little tax on it. I evidently had the 25% tax free rule wrong.....I can understand how you can interpret it either way....as usual, the description isn't good enough to be totally clear.

I specifically asked her to clarify this. Pension. She wasn't able to touch it until after 55 and since we didn't need the money we are just now thinking about what to do with it.

But did you tell her it was a pension or did you tell her that your wife invested a £20k lump sum in a  Standard life product a long time ago and it's now grown in value?

Have a look at the annual statement, it will tell you right there if it's a pension or another type of investment
I think it is probably not a pension because it just sounds really similar to an investment I had at one time. (It had complicated rules about disposal but they were not the same as the rules for a pension, there was no age limitation for example) In the end I paid for advice on how to get rid of it!

Just took another look at the opening page, this is what it shows....

Your pension

Total value as at 18 Oct 2021
£68,112

Investment growth since plan start date
£45,882

Just took another look at the opening page, this is what it shows....

Your pension

Total value as at 18 Oct 2021
£68,112

Investment growth since plan start date
£45,882

Great, sorry for any worry!   

Great, sorry for any worry!   

No problem. I'm just a bit crushed because I understood the 25% tax free thing wrong. Like I said.....once that option got the kaput, I think we are just going to treat it like any other kind of income for my wife. Just need to juggle the numbers every year to see how much we can take out without paying much tax. That's another reason to take my wife off my US taxes this year.....and will make doing my US taxes a little easier. Once we do that and move a little money into just my wife's name I should be able to stop doing FATCA.....still have to do FBAR though.

No problem. I'm just a bit crushed because I understood the 25% tax free thing wrong. Like I said.....once that option got the kaput, I think we are just going to treat it like any other kind of income for my wife. Just need to juggle the numbers every year to see how much we can take out without paying much tax. That's another reason to take my wife off my US taxes this year.....and will make doing my US taxes a little easier. Once we do that and move a little money into just my wife's name I should be able to stop doing FATCA.....still have to do FBAR though.

I don't know the rules for pensions off hand but it's not true of her to say that "Evidently NOTHING happens over the £12570 threshold without getting taxed."

I just looked at one of my tax calculations and they start with the total income then deduct the personal allowance.
Then they split the income by type and tax rate and some of those rates are zero, for example the first however much of savings income.

So you can definitely get more income at zero tax than just the personal allowance.

I don't know the rules for pensions off hand but it's not true of her to say that "Evidently NOTHING happens over the £12570 threshold without getting taxed."

I just looked at one of my tax calculations and they start with the total income then deduct the personal allowance.
Then they split the income by type and tax rate and some of those rates are zero, for example the first however much of savings income.

So you can definitely get more income at zero tax than just the personal allowance.

Exactly.

As well as the personal tax free exemption, the first £1k of interest is exempt and also the first £2k of dividend income (which my wife receives each year).  Each year we also sell some shares from an ETF my wife holds in the USA and the first £12.5k of cap gains are also tax free.