Pension Lump Sum & Tax CONFUSED

kalialba

Confused. – I am due to receive my civil service pension at age 60 from April 2016. (Classic Scheme)

Projection is £14,574 per annum with a lump sum of £43,724. Alternatively I can have a lump sum of £ 71,750 with an annual pension of £12,240.

In addition, I can re claim widower contributions of around £10,000.

The guide to the pension scheme states that in most cases the lump sum is tax free. The annual pension would be subject to the usual income tax.

Now I am confused with the new rulings coming in to force.

I will not have any other income or pension at age 60 unless I get a part time job. Can anyone advise if my lump sum will be subject to tax and if so at what rate?

If it makes a difference to the tax position, I can take my pension any time from now however the figures are reduced by around 5% per year before pension age to reflect that the pension will be paid for a longer period.

Any advice appreciated.

jem16

kalialba wrote: »

Now I am confused with the new rulings coming in to force.

The new pension rules don't apply to defined Benefit pensions such as yours.

I will not have any other income or pension at age 60 unless I get a part time job. Can anyone advise if my lump sum will be subject to tax and if so at what rate?

You are entitled to 25% lump sum tax free. The Civil Service scheme will not allow you to take any higher than that. Your tax-free lump sum will not be taxed.

Your pension income will be taxed just like your job. You will have a tax free allowance just like your job.

You are probably best advised to take only the automatic lump as the higher lump sum is achieved by giving up valuable pension and the commutation rate for this is dire.

david78

kalialba wrote: »

Projection is £14,574 per annum with a lump sum of £43,724. Alternatively I can have a lump sum of £ 71,750 with an annual pension of £12,240.

In first case, the value of your benefits is 20*£14574 + £43724 = £335204 so lump sum is 13% of the value (within the rules).

In the second case, the value of your benefits is 20*£12240 + £71750 = £316550 so lump sum is 23% of the value (within the rules).

In each case the lump sum will be tax free.

Your_Hero

david78 wrote: »

In first case, the value of your benefits is 20*£14574 + £43724 = £335204 so lump sum is 13% of the value (within the rules).

In the second case, the value of your benefits is 20*£12240 + £71750 = £316550 so lump sum is 23% of the value (within the rules).

In each case the lump sum will be tax free.

This is fundamentally correct but the scheme will not allow you to take more than 25% of the notional value anyway. The maximum allowable additional lump sum is 33/14 of the initial pension (http://www.civilservicepensionscheme.org.uk/media/94747/classic-scheme-guide2.pdf)

When the scheme says "in most cases the lump sum is tax free", it is referring to the lifetime allowance. And if your lump sum exceeds 25% of the LTA (£1.25m without transitional protection), then the excess will be subject to a tax charge.

david78

[QUOTE=Your Hero;66941599
When the scheme says "in most cases the lump sum is tax free", it is referring to the lifetime allowance. And if your lump sum exceeds 25% of the LTA (£1.25m without transitional protection), then the excess will be subject to a tax charge.[/QUOTE]

Agreed.

In this case the OP doesn't have any other pensions so the LTA limit isn't being breached (values of LTA used when benefits are taken are in my post above). The sum will therefore be tax free, which is the OPs main concern.

kalialba

Thanks a lot for the responses and advice. Pleased to know that the lump sum will not be subject to tax.