tax on pension payments

malcb

I'm sorry to go back to absolute basics but may I ask those more knowledgeable than me to confirm that
1) part of my pension will be from 2 Defined Benefit schemes - I assume that on this income I will pay tax at my standard rate on the full amonut, once the over 65 personal allowance is applied.
2) the remainder will be lump sums from various AVC, Stakeholder pensions built up over 40 years. Were I to use these to but an annuity then I believe I pay tax on the income portion of the annuity but not the capital element.

There will be a follow-up question but it hinges on my understanding above being correct. And, as with all training, if I'm unsure I daresay others here are wondering too!

jem16

malcb wrote: »

I'm sorry to go back to absolute basics but may I ask those more knowledgeable than me to confirm that
1) part of my pension will be from 2 Defined Benefit schemes - I assume that on this income I will pay tax at my standard rate on the full amonut, once the over 65 personal allowance is applied.

Yes provided your income is not over the age allowance threshold which is currently £24k. After that you start to lose some of that extra allowance.

2) the remainder will be lump sums from various AVC, Stakeholder pensions built up over 40 years. Were I to use these to but an annuity then I believe I pay tax on the income portion of the annuity but not the capital element.

Yes in just the same way as income from the DB schemes. It would all be added together.

Aegis

jem16 wrote: »

Yes provided your income is not over the age allowance threshold which is currently £24k. After that you start to lose some of that extra allowance.



Yes in just the same way as income from the DB schemes. It would all be added together.

To clarify: pension annuities are all taxed as income, not part capital, part income.

jem16

Aegis wrote: »

To clarify: pension annuities are all taxed as income, not part capital, part income.

I was assuming ( although perhaps wrongly) that by capital element, the OP meant the tax-free lump sum. Perhaps the OP can clarify.

Aegis

jem16 wrote: »

I was assuming ( although perhaps wrongly) that by capital element, the OP meant the tax-free lump sum. Perhaps the OP can clarify.

Ahhh, I thought he was getting confused between a pension annuity and a purchased life annuity (i.e. outside a pension), where the payments are part taxed as income and part tax-free as return of capital.

jem16

Aegis wrote: »

Ahhh, I thought he was getting confused between a pension annuity and a purchased life annuity (i.e. outside a pension), where the payments are part taxed as income and part tax-free as return of capital.

You could be correct.

malcb

"To clarify: pension annuities are all taxed as income, not part capital, part income."

Thank you - this is most helpful. So, to clarify, if I buy an annuity with the proceeds of an ISA, say, then I only pay tax on the income element but if I buy an annuity with the proceeds of a stakeholder or personal pension or an AVC then this is a "pensions annuity" and so taxable in full? (And is that HMRC's logic ie if I got 20% tax relief on the contributions this is then "neutralised" by the 20% paid on the resulting income? Can't immediately think of a better word than "neutralised" but hopefully readers will get my gist and can put it more elegantly!)

malcb

jem16 wrote: »

You could be correct.

Yes that was the source of my confusion - which I am grateful has been clarified.

jem16

malcb wrote: »

"To clarify: pension annuities are all taxed as income, not part capital, part income."

Thank you - this is most helpful. So, to clarify, if I buy an annuity with the proceeds of an ISA, say, then I only pay tax on the income element but if I buy an annuity with the proceeds of a stakeholder or personal pension or an AVC then this is a "pensions annuity" and so taxable in full?

Yes this is correct.

This info on Purchased Life Annuities might help
http://www.sharingpensions.co.uk/pension_annuity9.htm#text3

(And is that HMRC's logic ie if I got 20% tax relief on the contributions this is then "neutralised" by the 20% paid on the resulting income? Can't immediately think of a better word than "neutralised" but hopefully readers will get my gist and can put it more elegantly!)

Basically yes. The tax relief on pensions is deferred tax which may cancel itslef out depending on circumstances.

malcb

So, thanks to the posters, I've now got my head round compulsory purchase (pension) annuities and purchase life annuity and the different ways each are taxed on receipt.
Under my LGPS I get a lump sum (in addition to my DB pension) - am i right in thinking that I can use this to buy a purchase life annuity rather than a pension annuity - and so get the tax advantages that the former brings?
Thanks in anticipation.

Aegis

malcb wrote: »

So, thanks to the posters, I've now got my head round compulsory purchase (pension) annuities and purchase life annuity and the different ways each are taxed on receipt.
Under my LGPS I get a lump sum (in addition to my DB pension) - am i right in thinking that I can use this to buy a purchase life annuity rather than a pension annuity - and so get the tax advantages that the former brings?
Thanks in anticipation.

You could, but it might not be the most efficient way to generate future growth from your lump sum. It's worth exploring all your options before you commit to permanently handing over your savings to an insurance company.