20% tax deducted from lump sum

smiffy

If the only income for a Tax year is a pension lump sum, can I reclaim the 20% tax deducted at source by the pension company?

Thanks

MoneySavingUser

yes - are you sure it is a normal tax free lump sum and not a trivial commutation (same answer in regards to reclaiming tax but that would explain why it was deducted though strictly it should only be deducted from the taxable element).

xylophone

OP, can you explain what you mean by "lump sum"?

Do you mean what remains after taking the tax free lump sum?

This portion is taxed as income - whether or not you can claim all tax deducted will depend on your tax free allowance and the gross amount of the remainder referred to above.

Thrugelmir

smiffy wrote: »

If the only income for a Tax year is a pension lump sum, can I reclaim the 20% tax deducted at source by the pension company?

Thanks

How much was the lump sum?

jamesd

If that also means that all money is removed from the pension pot you can make the claim immediately. Otherwise you'll need to wait until the end of the tax year.

smiffy

Thanks for the replies.

The Lump Sum is only £4,800. I've been told by Scottish Widows that it can be paid 25% tax free, and then they tax the remainder at 20%.

In the 2015-2016 Tax Year it's possible that the fund holder will not have any income from regular employment, only SSP and ESA following a heart attack and subsequent heart triple bypass surgery.

According to the annual statement, the fund would offer a pension of £157 per year - so that would need to be paid for 26yrs to equate to the plans current taxed lump sum value.

dunstonh

The Lump Sum is only £4,800. I've been told by Scottish Widows that it can be paid 25% tax free, and then they tax the remainder at 20%.

For a triviality payment, that is correct. They have to tax it as month one earnings. You are lucky there is no 40% tax on it too.

you can apply to have the tax refunded via HMRC if you are not a tax payer or the amount of tax is too much.

According to the annual statement, the fund would offer a pension of £157 per year - so that would need to be paid for 26yrs to equate to the plans current taxed lump sum value.

Although you never go by the annual statement as they understate the likely figure and by some way in this case.

xylophone

http://www.thisismoney.co.uk/money/pensions/article-2966766/Savers-using-pension-freedom-warned-pay-emergency-tax.html

jamesd

smiffy wrote: »

only SSP and ESA following a heart attack and subsequent heart triple bypass surgery. ... According to the annual statement, the fund would offer a pension of £157 per year - so that would need to be paid for 26yrs to equate to the plans current taxed lump sum value.

There's no possibility at all that the income given on the annual statement will be correct for a person with the medical history described unless the vendor of the annuity concerned deliberately chose to avoid seeking and using medical information.

A person with reduced life expectancy due to a medical condition will qualify for an "enhanced annuity" that pays out an increased amount over standard lifetime annuities because of the reduced life expectancy. The statement will also be using an RPI inflation linked annuity, not a level annuity that is likely to be more appropriate and pay 50-100% more to a person with medical conditions. The real amount payable would probably be in the range of 2-4 times as much assuming that a level enhanced annuity was purchased.

However, this still doesn't mean that taking the annuity purchase is a good idea. It probably isn't.

If the person has been diagnosed as having a life expectancy lower than one year please say so because it dramatically improve the tax position: the whole pension pot is available tax free.

If the person is 60 years old or older I suggest that they seek a small pot payment. If not I suggest that they wait until 6 April 2015 and then use an uncrystallised funds pension lump sum (UFLS) to draw the money.

I'm assuming that there is no prospect in the future of working and desiring to pay more than £10k into a pension. If there's a desire to preserve the higher £40k a year limit please say so.