Pansion as a lump sum - is this right?

dorothykoh

My pension is £15953. Because it is less than £18000 I can take it as a lump sum which I intend to do and add it to my other investments for my retirement. Prudential have quoted that if I take a cash free sum and a pension I could have £3988 tax free and £575.40 per year. But if I take the full fund as a cash sum, then after tax adjustment I would have £10465.58. Surely this can't be right - I am in the lowest tax bracket. Would I really have to pay £5488 tax on £15953?

Linton

You can only take the amount as cash if the sum total of ALL your pensions is less than the limit.

25% of the lump sum is tax free, the rest is taxed as income in the current year. So where their lump sum figure comes from I dont know - suggest you ask them.

dunstonh

But if I take the full fund as a cash sum, then after tax adjustment I would have £10465.58. Surely this can't be right - I am in the lowest tax bracket. Would I really have to pay £5488 tax on £15953?

Pensions paid under triviality have tax deducted at source which is based on month one earnings. So part of it will be no tax, part will be basic rate and part will be higher rate.

Once it is paid and your earnings complete for the year you can let HMRC know and they will adjust the tax and refund any overpayment. You can do it before the tax year end if you wish.

Remember that triviality applies to ALL pensions. Not each one individually. If you have other pensions then you cannot use triviality if the total of all is over £18000. Doing so would leave you open to getting a fine and greater tax penalty.

dorothykoh

Unfortunately the total of my pensions is less than £18000.

dorothykoh

I asked for a breakdown of my pension fund and I am even more confused - this is what I have been sent.

Value of fund : £16759
Tax free portion: £4189.75
Taxable amount: £12,569.25
PAYE tax deducted £5789.42
Net amount payable: £10,969.58

They have given me a chart that shows that £2211.54 will be taxed at 40% - tax due £884.62 and that £9540.79 will be taxed at 50% - tax due £4770.19.

What I can't understand is why is some of my pension being taxed at 40% and 50% - the £16,759 + my annual salary doesn't even take me anywhere near the £35,000 tax bracket so I thought that I would be paying tax at 20% I can't bekieve that I should be paying £5789.42 tax on £12,569.25

Can someone please explain - I am so confused and need to make a decision very soon.

wallpaperman

The way that pension companies are instructed by HMRC for taxation on triviality is to assume that the payment is a monthly income and that you will be getting that each month. I know it sounds crazy, but that's how it works.

Therefore, the calculation is along the lines that you will be getting £16759 evey month and is taxing it accordingly.

If you settle on triviality, your pension company will send you a P45 showing the tax deducted (they also, of course, advise HMRC of the same) and you can use this to reclaim some of the tax, depending on your overall postion for the tax year. You don't have to wait for the end of the tax year to do this.

I'm afraid that if you want that option you are going to have to accept that a chunk will be getting taken off in tax initially. You should get a portion of that back if you are a basic rate taxpayer.

molerat

http://www.litrg.org.uk/pensioners/life-events/coming-up-retirement/triv-comm

When you have received the P45 from the pension company contact your tax office and ask for a P53 for repayment in year.

RichandJ

dorothykoh wrote: »

I asked for a breakdown of my pension fund and I am even more confused - this is what I have been sent.

Value of fund : £16759
Tax free portion: £4189.75
Taxable amount: £12,569.25
PAYE tax deducted £5789.42
Net amount payable: £10,969.58

They have given me a chart that shows that £2211.54 will be taxed at 40% - tax due £884.62 and that £9540.79 will be taxed at 50% - tax due £4770.19.

What I can't understand is why is some of my pension being taxed at 40% and 50% - the £16,759 + my annual salary doesn't even take me anywhere near the £35,000 tax bracket so I thought that I would be paying tax at 20% I can't bekieve that I should be paying £5789.42 tax on £12,569.25

Can someone please explain - I am so confused and need to make a decision very soon.

Doesn't sound right to me. £12,569 is only just over £150k as an annual amount, I'd go back and ask them to check their figures again.

Even allowing for the personal allowance clawback I don't think you should be subject to that much 50%, although I'm not a payroll person (and am happy to be corrected).

xylophone

http://www.litrg.org.uk/pensioners/life-events/coming-up-retirement/triv-comm

wallpaperman

RichandJ wrote: »

Doesn't sound right to me. £12,569 is only just over £150k as an annual amount, I'd go back and ask them to check their figures again.

Even allowing for the personal allowance clawback I don't think you should be subject to that much 50%, although I'm not a payroll person (and am happy to be corrected).

I think the tax quoted looks a bit on the high side to me as well, at least from the calculator that I have at my work that our company work from. I got the tax amount to be a bit over £4k, but I can check that again on Monday. All companies should be calculating the tax the same way I would have thought.

wallpaperman

xylophone wrote: »

http://www.litrg.org.uk/pensioners/life-events/coming-up-retirement/triv-comm

That is a very good link, explains all the different aspects of triviality clearly unlike HMRC's own website.