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    • alfsmum
    • By alfsmum 8th Feb 18, 8:57 AM
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    alfsmum
    Taking lump sum to avoid income tax
    • #1
    • 8th Feb 18, 8:57 AM
    Taking lump sum to avoid income tax 8th Feb 18 at 8:57 AM
    There are a couple of threads running about considerations when taking lump sum vs pension, but can I ask a simple (probably numpty question)?

    This year at age 60 I can take a small civil service pension of about £4,500. Maximum lump sum available would be £19,000 reducing annual pension to £2,900 (round figures).

    I will also have a deferred pension of around £3,000 to take at 60 so total pension around £7,500.

    At 66 I will get state pension of £128 so around £6,000 pa.

    Taking everything as pension, at 66 (not taking into account index linked pension) total income could be £13,500, taking me into the basic income tax bracket by a smallish amount.

    I begrudge the thought of handing anything else to the taxman so....
    Should I consider a partial lump sum to avoid income tax in the future and if so how much? Taking the maximum lump sum would mean that I’d start losing out at age 72. I should make it into my eighties if I follow the family life expectancy.

    I wouldn’t be rushing to do anything with the lump sum other than move it into an ISA to use when and if needed.

    Grateful for any thoughts.
Page 1
    • crv1963
    • By crv1963 8th Feb 18, 9:23 AM
    • 229 Posts
    • 561 Thanks
    crv1963
    • #2
    • 8th Feb 18, 9:23 AM
    • #2
    • 8th Feb 18, 9:23 AM
    There are a couple of threads running about considerations when taking lump sum vs pension, but can I ask a simple (probably numpty question)?

    I begrudge the thought of handing anything else to the taxman so....
    Should I consider a partial lump sum to avoid income tax in the future and if so how much? Taking the maximum lump sum would mean that I’d start losing out at age 72. .

    I wouldn’t be rushing to do anything with the lump sum other than move it into an ISA to use when and if needed.

    Grateful for any thoughts.
    Originally posted by alfsmum


    If you don't need an increased lump sum why take one to sit in an ISA? I understand wanting to reduce or not pay tax on income but tax allowance should rise and it could eventually lift you out of paying tax on an income of 13k pa.


    You could pay enough into a SIPP to get the tax back then take the 25% tax free sum? Then if you don't need any extra income you could just leave it until you do?
    CRV1963- Light bulb moment Sept 15- Planning the great escape- aka retirement!
    • ermine
    • By ermine 8th Feb 18, 10:13 AM
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    ermine
    • #3
    • 8th Feb 18, 10:13 AM
    • #3
    • 8th Feb 18, 10:13 AM
    I begrudge the thought of handing anything else to the taxman so....
    Originally posted by alfsmum
    Unless you invest the lump sum wisely, you will simply be handing the money to inflation instead, which is an indirect form of taxation So make sure that's an S&S ISA and you keep costs down. And perhaps not start when stock markets are only just off all-time highs. If this wobble becomes a bear market, falls of > 30%, maybe then go for it... Trouble is you have to be ready to see a suckout of 50% or more, some thigns have to get worse before they get better

    plus as @crv1963 says, tax thresholds tend to drift upwards, you're not so far off.
    • Silvertabby
    • By Silvertabby 8th Feb 18, 11:26 AM
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    Silvertabby
    • #4
    • 8th Feb 18, 11:26 AM
    • #4
    • 8th Feb 18, 11:26 AM
    !!!8220; I begrudge the thought of handing anything else to the taxman so....
    Originally posted by alfsmum
    If you commute, you'll just be 'handing' some of your pension benefits back to the CS pension fund.

    Do this little sum, using your figures of £4500 pension only or £2900 pension plus £19K lump sum:

    Assuming that you retire at 60 and then live to 85:

    Minimum (or no) lump sum and standard pension:
    25 x pension plus 1 x lump sum (nil in this case) =
    25 x £4,500 = £112,500

    Maximum lump sum and reduced pension:
    25 x pension plus 1 x lump sum =
    25 x £2,900 + 1 x £19,000 = £91,500

    The difference (£21K) is the amount you will be giving up. How does that compare with the income tax you are trying not to pay?

    ADD:
    £4,500 - £2,900 = £1,600 x 20% tax = £320 per year x 25 = £8,000

    DOUBLE ADD:
    And this doesn't even take into account the inflation increases on the commuted part of the pension that you'd also be giving up.
    Last edited by Silvertabby; 08-02-2018 at 12:38 PM.
    • kidmugsy
    • By kidmugsy 8th Feb 18, 12:10 PM
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    kidmugsy
    • #5
    • 8th Feb 18, 12:10 PM
    • #5
    • 8th Feb 18, 12:10 PM
    Assuming that you live to 85:

    Minimum (or no) lump sum and standard pension:
    20 x pension plus 1 x lump sum =
    Originally posted by Silvertabby
    I think you mean 25 x, since alfsmum is just shy of sixty.
    Free the dunston one next time too.
    • Silvertabby
    • By Silvertabby 8th Feb 18, 12:19 PM
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    Silvertabby
    • #6
    • 8th Feb 18, 12:19 PM
    • #6
    • 8th Feb 18, 12:19 PM
    I think you mean 25 x, since alfsmum is just shy of sixty.
    Originally posted by kidmugsy
    Thank you - corrected !
    • kidmugsy
    • By kidmugsy 8th Feb 18, 12:29 PM
    • 10,169 Posts
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    kidmugsy
    • #7
    • 8th Feb 18, 12:29 PM
    • #7
    • 8th Feb 18, 12:29 PM
    This year at age 60 I can take a small civil service pension of about £4,500. Maximum lump sum available would be £19,000 reducing annual pension to £2,900 (round figures).

    I will also have a deferred pension of around £3,000 to take at 60 so total pension around £7,500.

    At 66 I will get state pension of £128 so around £6,000 pa.
    Originally posted by alfsmum
    I'd enquire what I'd have to pay in NICs to get a bigger State Pension. If it seemed good value than I might take a lump sum from the age-60 pensions to use to pay the NICs.

    By the way, are you planning to work on past 60?
    Free the dunston one next time too.
    • Tom99
    • By Tom99 8th Feb 18, 12:30 PM
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    Tom99
    • #8
    • 8th Feb 18, 12:30 PM
    • #8
    • 8th Feb 18, 12:30 PM
    Giving up an index linked £1,600pa for £19,000 is very poor value. A factor of only 12x when it would cost you at least 30x to buy that pension in the open market.
    • Triumph13
    • By Triumph13 8th Feb 18, 12:52 PM
    • 1,159 Posts
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    Triumph13
    • #9
    • 8th Feb 18, 12:52 PM
    • #9
    • 8th Feb 18, 12:52 PM
    Kidmugsy beat me to it.
    If at all possible, voluntary NICs to get the full state pension are by far the best investment you could make. If you don't have the cash to pay for them, then it would be a no brainer to commute one of the pensions and use the lump sum to pay the voluntary NICs as they work like a reverse commutation with a factor of only about 3.2x vs your 12x or whatever from commuting the pension
    • redux
    • By redux 8th Feb 18, 1:08 PM
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    redux
    Giving up an index linked £1,600pa for £19,000 is very poor value. A factor of only 12x when it would cost you at least 30x to buy that pension in the open market.
    Originally posted by Tom99
    I agree, and that's a simplified version of what Silvertabby explained.

    Put the other way round, what income could safely be obtained on £19,000? Certainly not £1600, probably not half that.

    In fact it even makes me some if the numbers need checking. In some schemes a maximum lump sum would normally leave three-quarters of the fund behind, so I don't see why the income afterwards is below two-thirds.If that truly is the correct offer, the lump sum variant really doesn't look worthwhile.
    • redux
    • By redux 8th Feb 18, 1:17 PM
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    redux
    I'd enquire what I'd have to pay in NICs to get a bigger State Pension. If it seemed good value than I might take a lump sum from the age-60 pensions to use to pay the NICs.

    By the way, are you planning to work on past 60?
    Originally posted by kidmugsy
    I don't see why a lump sum to fund the contributions.

    If this is about arrears, maybe, but with 6 years to go before state pension, surely 6 years could be added at one per year, by regular voluntary contributions? Plus maybe 2 years of arrears spread across that time

    Or what do I have wrong here? Can the reduction be by having been contracted out, rather than arrears?
    • Silvertabby
    • By Silvertabby 8th Feb 18, 1:17 PM
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    Silvertabby
    In fact it even makes me some if the numbers need checking. In some schemes a maximum lump sum would normally leave three-quarters of the fund behind, so I don't see why the income afterwards is below two-thirds.If that truly is the correct offer, the lump sum variant really doesn't look worthwhile. Posted by redux
    That would be the case with a money purchase 'pot of money', but not with a defined benefit scheme. In this case (as with all other public sector schemes) it's the 1:12 commutation rate (ie, give up £1 of annual pension for £12 of lump sum) that's the killer.
    Last edited by Silvertabby; 08-02-2018 at 1:21 PM.
    • Triumph13
    • By Triumph13 8th Feb 18, 1:21 PM
    • 1,159 Posts
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    Triumph13
    I don't see why a lump sum to fund the contributions.

    If this is about arrears, maybe, but with 6 years to go before state pension, surely 6 years could be added at one per year, by regular voluntary contributions? Plus maybe 2 years of arrears spread across that time

    Or what do I have wrong here? Can the reduction be by having been contracted out, rather than arrears?
    Originally posted by redux
    I think what you are missing is the possibility that she might not have the cash to pay the voluntary NICs unless she commutes the pension.
    • xylophone
    • By xylophone 8th Feb 18, 1:24 PM
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    xylophone
    At 66 I will get state pension of £128 so around £6,000 pa.
    Have you obtained a new state pension statement?

    https://www.gov.uk/check-state-pension

    Then see

    https://www.royallondon.com/Global/documents/GoodWithYourMoney/TOPPING-UP-YOUR-STATE-PENSION-GUIDE.pdf
    • alfsmum
    • By alfsmum 8th Feb 18, 2:08 PM
    • 583 Posts
    • 5,647 Thanks
    alfsmum
    Thanks for all the comments. I had considered that future rises in tax thresholds may indeed lift me pretty much out of tax altogether.

    I have 34 years NI contributions but the £128 state pension figure reflects COPE otherwise would be over £150.

    No plans to work beyond 60!!!
    • xylophone
    • By xylophone 8th Feb 18, 3:09 PM
    • 24,448 Posts
    • 14,314 Thanks
    xylophone
    I have 34 years NI contributions but the £128 state pension figure reflects COPE otherwise would be over £150.
    Then consider voluntary contributions as described in link.
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