Small Funds Lump Sum ?

Lara-

I'm wondering if someone could offer me some advice on this subject please?

I've received some paperwork today regarding a pension fund I had, outlining various options.
One of the options is to take the entire fund (£17269.57) as a lump sum, subject to a tax charge. I meet all of the eligibility conditions.

I would like to take the lump sum but don't understand if it is all subject to tax after deduction of the 25% lump sum. In other words, I'd lose 20% of £12951 or would I be able to use any tax allowance against it ?

I'm sorry if it seems muddled, but I've no clue on how these things work.

dunstonh

would like to take the lump sum but don't understand if it is all subject to tax after deduction of the 25% lump sum. In other words, I'd lose 20% of £12951 or would I be able to use any tax allowance against it ?

25% is tax free. The other 75% is added to your income in this tax year (assuming you do it now). It is then taxed as income. So, you need to put your income so far this year together with this to see what tax would be paid.

Some people find that leaving it until the next tax is better from a tax point of view.

kidmugsy

dunstonh wrote: »

Some people find that leaving it until the next tax [year] is better from a tax point of view.

Is it possible, dunstonh, to draw it in two bites, one in 13-14 and one in 14-15?

Linton

Lara- wrote: »

I'm wondering if someone could offer me some advice on this subject please?

I've received some paperwork today regarding a pension fund I had, outlining various options.
One of the options is to take the entire fund (£17269.57) as a lump sum, subject to a tax charge. I meet all of the eligibility conditions.

I would like to take the lump sum but don't understand if it is all subject to tax after deduction of the 25% lump sum. In other words, I'd lose 20% of £12951 or would I be able to use any tax allowance against it ?

I'm sorry if it seems muddled, but I've no clue on how these things work.

The "triviality" lump sum is regarded as income and tax charged in the same way as employment income ie for standard rate tax payers 20% on the total money received in the tax year over your tax allowance.

kidmugsy

Lara- wrote: »

One of the options is to take the entire fund (£17269.57) as a lump sum, subject to a tax charge.

If this is happening because you are of retirement/state pension age, there is a wheeze you might consider. You could defer your State Retirement Pension, even if you have already started it, if that reduces the income tax you'll have to pay on the 75% that's tax-exposed. Then when you restart your SRP they reward you with an extra 10.4% on your SRP for each year you've had it deferred. Unless you have some objective reason to expect to die young, that reward is a great bargain.

Lara-

Many thanks to you all for replying.

I'm married and I'll be 60 this coming March and I'm not in employment.
I've not worked for several years so I presume I would be entitled to the full personal tax allowance for this year?

My husband is 72 this year and we rely on his pension. We own our own home which is mortgage free as we overpaid on it when we could. He deferred his state pension for 5 years and receives roughly £190 a week plus £26 pension guarantee credit. He also receives £77 per month from a pension fund that he had contracted out to. Total per month is roughly £1023.

I do have health issues such as RA, osteoporosis, pericardial effusion and a couple of other niggling things but not something that I would think they need to take into account.

We would like to downsize our home at sometime to release some funds, but to get the best deal, we would need to update both bathrooms and the kitchen which haven't been done since the '80's

My husband does not want to borrow money (he never liked having a mortgage)and so the only option is to take the lump sum, but I couldn't figure out how much of it we would actually get after the tax.

molerat

kidmugsy wrote: »

Is it possible, dunstonh, to draw it in two bites, one in 13-14 and one in 14-15?

No, trivial pension payments have to be taken in one go.

jamesd

Do you have any other pensions, whether they are paying now or not? The triviality option that you're apparently being offered is only available when the total value of all pensions except the state pensions is no more than £18,000.

The 17269.57 would have 25%, £4317.39 available as a tax free lump sum and £12952.18 as taxable income. Your personal allowance is £9440 this year so that much is also tax free, leaving £3512.18 subject to income tax. Basic rate tax on that would be £702.43, with you getting £2809.75 from this part.

So in total you would receive £4317.39 + £9440 + £2809.75 = £16567.14.

It does not appear to be sensible for you to take all of this in one tax year because that causes you to pay £702.43 in income tax that you can easily avoid by transferring some of the money to another personal pension. You can then take the money from the first one in this tax year and the new one next tax year.

I suggest that you:

1. transfer £4,000 to another pension provider.
2. once that has completed, take triviality from the remaining amount in this pension, to use this year's personal allowance.
3. in late April 2014 take triviality from the new place to use some of next years tax allowance.

Hargreaves Lansdown charges £150 for a triviality payment, plus VAT, so £180 total. Maybe someone else can suggest a cheaper place, possibly Virgin, which doesn't mention a charge for this. The £180 is still cheaper than the £702.43 income tax that you would pay otherwise.

Do you have any savings accounts that pay interest? The interest from those also counts towards income tax and that needs to be allowed for. If you can say how much that will be, roughly, this tax year I can allow for that. So far I've allowed for a bit under £500 of other taxable income this year.

kidmugsy

Lara- wrote: »

We would like to downsize our home at sometime to release some funds, but to get the best deal, we would need to update both bathrooms and the kitchen which haven't been done since the '80's

Does one really get back the money spent? We're updating our kitchen and bathroom, but it's for us not for our successors. For all we know they'll bin our improvements anyway.

kidmugsy

jamesd wrote: »

I suggest that you:

1. transfer £4,000 to another pension provider.
2. once that has completed, take triviality from the remaining amount in this pension, to use this year's personal allowance.
3. in late April 2014 take triviality from the new place to use some of next years tax allowance.

Hargreaves Lansdown charges £150 for a triviality payment, plus VAT, so £180 total.

What a good idea. I'll point to someone cheaper. Hargreaves Lansdown. Their new charge sheet (effective on 1/3/2014 I think) shows triviality reduced to £75 +VAT. Halved, by golly!

Lara-

jamesd wrote: »

Do you have any other pensions, whether they are paying now or not? The triviality option that you're apparently being offered is only available when the total value of all pensions except the state pensions is no more than £18,000.

The 17269.57 would have 25%, £4317.39 available as a tax free lump sum and £12952.18 as taxable income. Your personal allowance is £9440 this year so that much is also tax free, leaving £3512.18 subject to income tax. Basic rate tax on that would be £702.43, with you getting £2809.75 from this part.

So in total you would receive £4317.39 + £9440 + £2809.75 = £16567.14.

It does not appear to be sensible for you to take all of this in one tax year because that causes you to pay £702.43 in income tax that you can easily avoid by transferring some of the money to another personal pension. You can then take the money from the first one in this tax year and the new one next tax year.

I suggest that you:

1. transfer £4,000 to another pension provider.
2. once that has completed, take triviality from the remaining amount in this pension, to use this year's personal allowance.
3. in late April 2014 take triviality from the new place to use some of next years tax allowance.

**As a new poster, I've had to delete the links so that I could quote your post**

Do you have any savings accounts that pay interest? The interest from those also counts towards income tax and that needs to be allowed for. If you can say how much that will be, roughly, this tax year I can allow for that. So far I've allowed for a bit under £500 of other taxable income this year.

You've made it so easy to understand the tax calculation. I was so confused by the 25% tax free part and the personal tax free allowance.

Unfortunately, we have no savings. Any extra income we ever had, my husband used to overpay on our endowment mortgage. As a result the endowment policy just managed to cover the loan at maturity. Nothing was left over unfortunately.

I think your first suggestion sounds very sensible and I'm almost certain that I shall now do that, but I'm confused by the bit about taking triviality again in late April 2014?

I'm 60 on the 18th March so should I take the lump sum (minus the £4000) before April 6th or if I take it after April 6th would that be an advantage because of the £10,000 tax free allowance for year 14/15 or is that option not permitted?

I've got so many questions swirling around in my head and as I can't make sense of them, I doubt I can explain things clearly