Tax on nhs pension

pollyanna24

jem16 wrote: »

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.



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



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.

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

Thanks for all your help. I will see if he has any paperwork for me to look at.

Above, you say that pensions are taxed at the normal rate of income. So, just to be completely clear, this will be the monthly payment he gets, but he will get the lump sum tax free? Why is this lump sum not classed as income?

pollyanna24

The only reason Dad was thinking about deferring his pension was if he had to work an extra year to avoid the tax.

He mentioned to me that the monthly payment (which I think would total £8,000 for year) would be added on and he would a slightly higher monthly sum when he started his pension the following year.

jem16

pollyanna24 wrote: »

Above, you say that pensions are taxed at the normal rate of income. So, just to be completely clear, this will be the monthly payment he gets,

That's correct, yes.

but he will get the lump sum tax free?

Yes he will.

Why is this lump sum not classed as income?

Pension law allows you to have up to 25% of your pension as a tax-free lump sum. This is also known as the Pension Commencement Lump Sum.

With DC schemes it's a simple 25% of the pot. With DB schemes it's worked out differently as some have an automatic lump sum and some have no automatic lump sum and you have to commute some pension to receive it.

Ask your Dad (or find out) which section of the NHS scheme he was a member of and whether or not he also paid into an AVC fund, often the Prudential.

jem16

pollyanna24 wrote: »

The only reason Dad was thinking about deferring his pension was if he had to work an extra year to avoid the tax.

The only problem with that is that with most DB schemes there comes a time when not taking it simply means losing it. If your Dad was still working with the NHS and still paying into the scheme then he may find this useful. For someone who has already reached the maximum contributions, it would not be a sensible thing to do. With only 20 years service your Dad could continue working and paying into his pension.

However working for an extra year to avoid a 50% tax that does not exist would be very stupid.

He mentioned to me that the monthly payment (which I think would total £8,000 for year) would be added on and he would a slightly higher monthly sum when he started his pension the following year.

Yes it appears that he's still building up years of service so it would increase his pension.

pollyanna24

Again, thank you so much, you have been a great help.

I will look into all this tonight when I see my parents.

quotememiserable

pollyanna24 wrote: »

Above, you say that pensions are taxed at the normal rate of income. So, just to be completely clear, this will be the monthly payment he gets, but he will get the lump sum tax free? Why is this lump sum not classed as income?

the lump sum is tax free because pensions law allows for up to 25% to be taken tax free at commencement of the pension. I'm not sure of the history of this but it is a fact as several people here have said. Any monthly sums received after that as ongoing pensions payments are taxed like any other income - which of course means not at all if you earn less than £10k.

pollyanna24

quotememiserable wrote: »

the lump sum is tax free because pensions law allows for up to 25% to be taken tax free at commencement of the pension. I'm not sure of the history of this but it is a fact as several people here have said. Any monthly sums received after that as ongoing pensions payments are taxed like any other income - which of course means not at all if you earn less than £10k.

Thanks for your reply.

How do you work out what 25% of your pension is?

My dad will be receiving about £700 (aside from the state pension which I believe has nothing to do with this) a month as well as the lump sum of £32,000.

jem16

pollyanna24 wrote: »

Thanks for your reply.

How do you work out what 25% of your pension is?

With a DB pension, not so easily. There are calculators on the NHS website to allow you to do this.

http://www.nhsbsa.nhs.uk/Pensions/4202.aspx

However do remember that with Public Sector schemes, taking the larger lump sum isn't a good idea as it's poor value compared with what you have to give up. Far better to take the higher pension. Has your Dad any plans for this lump sum that he wants the higher lump sum?

My dad will be receiving about £700 (aside from the state pension which I believe has nothing to do with this) a month as well as the lump sum of £32,000.

State pension has nothing to do with what he receives but it will all be counted as taxable income. So £8400 from the NHS plus what will he receive as a state pension?

kidmugsy

pollyanna24 wrote: »

How do you work out what 25% of your pension is?

You don't: the 25% figure is misleading because it applies to a quite different sort of pension. What applies to your father's NHS pension is, from the link I gave you above: "Your lump sum will normally be 3 times your yearly pension".


So, £700x12 = £8400.
£8400x3 = £25000 approx.

This could be compatible with the figure you reported only if the "£700" is very approximate, or if it is a figure arrived at after subtracting income tax.

jem16

kidmugsy wrote: »

You don't: the 25% figure is misleading because it applies to a quite different sort of pension. What applies to your father's NHS pension is, from the link I gave you above: "Your lump sum will normally be 3 times your yearly pension".

Depends on which section he is a member of. If 1995 section then yes the above applies.

So, £700x12 = £8400.
£8400x3 = £25000 approx.

This could be compatible with the figure you reported only if the "£700" is very approximate, or if it is a figure arrived at after subtracting income tax.

Yes but in Post #4 the OP says that her father has elected to take a larger lump sum.