Tax on nhs pension

pollyanna24

From the outset, I will admit to being completely clueless about pensions.

My dad has been paying into what I assume is an nhs pension for the last 20 odd years.

He is 65 in September and due to reive a lump sun of £32,000, bit has been told he has to pay 50% tax on this. Is this right? It sounds very high to me.

But, cos of changes in the law, if he decides to defer for a year, he won't get taxed on it.

He's in a quandary at the minute as he doesn't understand pensions either, and is willing to take a bit on his lump sum, but never expected it to be this much. He doesn't want to work the extra year, but will if it means losing this much money.

Why is the tax 50%? Although my brother has mentioned figures of as much as 55%.

xylophone

This seems very puzzling - if you are referring to his NHS pension commencement lump sum it should be tax free?

http://www.nhspa.gov.uk/PDweb/PensionCalculators/StandardPension/

kidmugsy

pollyanna24 wrote: »

My dad has been paying into what I assume is an nhs pension for the last 20 odd years.

He is 65 in September and due to reive a lump sun of £32,000, bit has been told he has to pay 50% tax on this. Is this right?
But, cos of changes in the law, if he decides to defer for a year, he won't get taxed on it.

If it is an NHS pension then wouldn't it be a final salary pension that he's due? And if that brings with it a "pension commencement lump sum" then that is tax-free.
http://www.nhspa.gov.uk/PDweb/PensionCalculators/StandardPension/

Who was it that told him he'd have to pay 50% tax? The NHS is notorious for the spreading of malign misinformation about pensions.

pollyanna24

My dad refers to his lump sum as his super ann. I'm guessing his means super annuity.

He spent a while a few months ago considering whether he should take a higher lump sum and lower monthly sums or the other way round and decided he wanted the higher lump sum. But maybe it's not worth it if he is not going to receive it all.

Apparently it's the 'pensions lady' at the hospital who has told dad this.

I've asked dad to let me look at any paperwork because surely it would be mentioned somewhere if he is going to be charged that much tax.

PeacefulWaters

Apparently it's the 'pensions lady' at the hospital who has told dad this.

I would suggest he never talks to her again.

http://www.nhsbsa.nhs.uk/Pensions/Documents/Pensions/Booklet_R_(V15)_online_-_04.2014.pdf

Page 39 has a "contact us" section. Use it!

Wilkins

This cannot be right. The first £30k of the lump sum should be tax free with the remainder taxed at the pensioner's tax rate. For 20% taxpayers it may be taxed initially at 40%, in which case there will be a subsequent refund. So total tax payable will be £600 or £1200 (max).

However, if your Dad is in good health and has no pressing need for capital then he should forego at least some of the lump sum for a bigger pension, since the commutation rate may not be advantageous. This has nothing to do with tax, but is just a better deal.

Get hold of the scheme booklet:

http://www.nhsbsa.nhs.uk/2566.aspx

Read and then return to "the pension lady".

PeacefulWaters

Wilkins wrote: »

This cannot be right. The first £30k of the lump sum should be tax free with the remainder taxed at the pensioner's tax rate.

I understood the situation as being retirement, not redundancy.

Wilkins

PeacefulWaters wrote: »

I understood the situation as being retirement, not redundancy.

Ooops, quite right. No tax at all, then. OP only seems to make any kind of sense if the pension in question is not NHS but an additional DC one.

jem16

pollyanna24 wrote: »

My dad refers to his lump sum as his super ann. I'm guessing his means super annuity.

Super ann stands for superannuation and is just another name for a company pension plan. There is no annuity involved with the NHS pension scheme as it's a Defined Benefit scheme.

He spent a while a few months ago considering whether he should take a higher lump sum and lower monthly sums or the other way round and decided he wanted the higher lump sum. But maybe it's not worth it if he is not going to receive it all.

He will receive all of it tax free. Your Dad will have been in the 1995 section which comes with an annual pension and a lump sum which is 3 times the annual pension. He has elected to take a higher lump sum by commuting some of the pension as he is entitled to have up to 25% tax free. Unfortunately with a dire commutation rate of 12:1, this was not the best decision.

Apparently it's the 'pensions lady' at the hospital who has told dad this.

Either your Dad has misunderstood what he was told or the pensions lady has done a bad job.

I've asked dad to let me look at any paperwork because surely it would be mentioned somewhere if he is going to be charged that much tax.

Your Dad's lump sum is definitely tax free. What he receives as an annual pension will be taxed just like any other income. This will not be 50%.

pollyanna24

Wilkins wrote: »

Ooops, quite right. No tax at all, then. OP only seems to make any kind of sense if the pension in question is not NHS but an additional DC one.

Thanks everyone for all your comments.

what is a DC pension?

I can only think there is something else involved here which I will look into with his paperwork. The lady must have got the 50% figure from somewhere. Are there pensions that do tax this much then?

My dad was given the impression that due to law changes, then if he deferred his pension for a year, then he wouldn't get taxed. Is there a change in law that might bring this about?

jem16

pollyanna24 wrote: »

Thanks everyone for all your comments.

what is a DC pension?

A Defined Contribution scheme where there is a pot of money invested in shares/funds.

The NHS scheme is a Defined Benefit scheme where there is no pot of money. Your Dad will receive benefits based on his final salary and length of service.

I can only think there is something else involved here which I will look into with his paperwork. The lady must have got the 50% figure from somewhere. Are there pensions that do tax this much then?

Pensions are taxed just as normal income. The highest band at the moment is 45%.

My dad was given the impression that due to law changes, then if he deferred his pension for a year, then he wouldn't get taxed. Is there a change in law that might bring this about?

There is a change of law proposed in the budget but only for Defined Contribution schemes. This is due to come into force in April 2015 if it's passed through.

Did your Dad have an AVCs with the NHS? These could be Defined Contribution and could possibly benefit by not being taken now. However deferring his main NHS pension for a year would be very foolish as Defined Benefit pensions are not affected by this change and it would simply mean he will lose out on a year's pension as there is no point in deferring past normal retirement age for the scheme.

From what you are saying, your Dad is just taking his main NHS pension at age 65 and will receive a pension and a tax-free lump sum. However if he was a member of the 1995 scheme, why didn't he take his pension at age 60 which is the normal retirement age?

It very much sounds like the "pensions lady" has got totally mixed up and hasn't a clue what she's on about.