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The link I cited in above is dated 2014.
There is this from 2015
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm073700The maximum trivial commutation lump sum death benefit payable
Paragraph 20 Schedule 29 Finance Act 2004
Where a lump sum meets the conditions for a trivial commutation lump sum death benefit, the maximum amount that can be paid as a trivial commutation lump sum death benefit from any registered pension scheme is £30,000 (£18,000 for a lump sum paid before 6 April 2015). This is the maximum amount per scheme, not a maximum across all schemes. Where the amount of the lump sum paid is more than £30,000, the excess is not a trivial commutation lump sum death benefit. If it cannot be paid as some other type of authorised lump sum death benefit the excess is an unauthorised member payment and taxed accordingly (see PTM131000).0 -
So the most my mum will pay is 40% tax of £260000
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Your mother would be commuting a pension already in payment so that the £26,139 will be taxed as her income in the tax year that she receives it.
See Do I have to pay tax on trivial commutation lump sum payments?
here https://www.litrg.org.uk/tax-guides/pensioners-and-tax/how-do-i-cash-my-small-pension-trivial-commutation
As you can see from the above, tax will be deducted by the administrator but your mother will need to have regard to her total taxable income in the tax year to determine whether she has paid the correct amount or overpaid or underpaid tax.
It could be that only basic rate tax is actually due.
If commuting the pension is likely to take her into a higher tax bracket, would not receiving the state pension make any difference? If so, I wonder would it be worth considering asking the administrator to hold off paying the money until the new tax year and asking the DWP to defer (stop paying) her state pension until a time of her choosing?
She could use the commuted pension as replacement income for a year or two and then start her (old rules) state pension again at a higher rate to account for the deferment?
https://www.litrg.org.uk/tax-guides/pensioners-and-tax/what-state-pension-deferral
https://www.saga.co.uk/magazine/money/retirement/pensions/should-you-defer-your-state-pension
https://www.moneysavingexpert.com/banking/tax-rates0 -
So the most my mum will pay is 40% tax of £26000
Yes but.......
Tax will be taken from the lump sum by the pension company before being paid out. Because of the way PAYE works it is likely that excess tax will be taken which may need to be reclaimed from HMRC. However the net effect will be that in the tax year any total income greater than the basic rate tax band limit (£45K for 2017/2018 under normal circumstances) will be taxed at 40%. So it all depends on her current income, it is possible that everything will be taxed at the basic rate.0 -
she only gets her state pension of £213 per week and this pension which is £220 a month. So her state pension is £11076 a year and the £26139 would be paid in july making a total for 2018/2019 of 37215. So does that ean she will only pay 25% on £26139?0
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she only gets her state pension of £213 per week and this pension which is £220 a month. So her state pension is £11076 a year and the £26139 would be paid in july making a total for 2018/2019 of 37215. So does that ean she will only pay 25% on £26139?
Someone with more understanding should be able to explain further but my take is.
For tax year 18/19 the personal tax free allowance is £11,850. So she may not have to pay tax on all of £26,139 if she has the balance of the personal tax allowance to claim. However I assume her State Pension will also increase for 18/19, so the vast majority of her personal tax free allowance is used by this.
The most tax she will have to pay is 25% of the £26,139. Will probably be slightly less depending on state pension for 18/19.Money SPENDING Expert0 -
she only gets her state pension of £213 per week and this pension which is £220 a month. So her state pension is £11076 a year and the £26139 would be paid in july making a total for 2018/2019 of 37215. So does that ean she will only pay 25% on £26139?
20% on £11076+£26139-£11850 (tax allowance) =£25365 ignoring any of Dad's pension income she gets April-June, after reclaiming the excess tax from HMRC. Seeing as July is only 4 months into the tax year she is likely to be charged 40% for some of her lump sum but this can be reclaimed.0 -
The commutation does not seem to be particularly generous!
A little over £26,000 for a pension ( index linked?) worth £2640 a year?
She is only 74 and assuming she is in good health could have another 20 years +!
Is she sure that she wants to take up the offer?
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Has she checked how keeping the pension/taking it as a lump sum could change any entitlement to state benefits? It may not, be worth checking before taking any definitive action.0
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If she does decide to take it then it will probably be early in the new tax year, so even if they have a tax code for the tax will seem horrendous as it will be taxed as if she is going to receive that every month, so tell her not to panic it is reclaimable. Unless she has debts which are urgent then the suggestion that she defers her state pension for a year is a very good one. If she is currently receiving £213 then a year would add over £21 a week, which would replace almost half the lost pension.
But I have to agree that the offer is somewhat less than generous. It certainly wouldn't come anywhere close to buying her an equivalent annuity - maybe £2000 a year, not £2600 she is currently getting & more of it would be taxable.
Unless she really needs the money urgently I would be telling them to put their offer in the polite version of where the sun doesn't shine. I should though add that I don't have the expertise that some of the above posters have.0
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