Tax question on 'triviality' lump sum

Geoffo_M

We are considering whether to buy an annuity or take a part/full cash payment on a small pension with L&G. The pension just falls within the £16,500 limits which allows us to take a full cash payment on the grounds of 'triviality'. However, I just don't understand their calculation of tax. The statement they provided says:-

Amount of Fund £16,455-43
Amount Payable tax free £4,113-86
Amount taxable as income £12,341-57
Tax to be deducted £4,155-46
Amount Payable £12,299-97

The tax calculates at 33%. Surely taxable income of £12,341 should be at 20% which calculates at £2,468? Or are there special tax rates for pension funds?

They say that by taking the 25% cash free and investing the £12,341 in an annuity would provide an annual pension of £780 - which I think is quite good and probably the better option, especially considering the large amount of tax we would be paying by taking a full cash payment.

EdInvestor

Trivial commutation proceeds are charged initially at emergency tax rates.You can claim the excess back from HMRC in the normal way. You will be showered by new tax codings upon retirement anyway so it should be sorted out in the process.Suggest you take the money.

MikeJones_2

Hi Geoffo M,

HMRC website has some easy-to-read information:

- Trivial commutation lump sums

The taxation issue is specifically discussed here:

- Taxation of a trivial commutation lump sum

Hope the information is useful to you. Post more if not.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.