Tax on pension

Hercules_Grytpype-Thynne

Having worked 5 years beyond the retirement age of 65, the offer on the table for my state pension is to take a larger pension of £197.00 per week or a lump sum of £36K with reduced weekly pension.


My question is:- Have I calculated this correctly?


£36,000 less £10,600 Personal Allowance means I will have to pay £5,188 in tax on the lump sum.


Whereas, the higher weekly pension comes to £10,244 pa, which means I will not have to pay any tax.


Any help please will be much appreciated.

McKneff

Do you actually pay tax on your pension lump sum.
Ive been retired around 3 years so I have forgotten. I really don't remember doing so but I could be wrong.

jem16

Hercules_Grytpype-Thynne wrote: »

Having worked 5 years beyond the retirement age of 65, the offer on the table for my state pension is to take a larger pension of £197.00 per week or a lump sum of £36K with reduced weekly pension.

What does the reduced pension work out as?

My question is:- Have I calculated this correctly?


£36,000 less £10,600 Personal Allowance means I will have to pay £5,188 in tax on the lump sum.

As far as I understand it, any tax on the lump sum is worked out from your tax position. If you are a non-taxpayer, then the lump sum is tax-free.

However whether it's better to take the higher pension or a lump sum is another question.

jamesd

Higher weekly pension is usually a far, far better deal compared to the low gain from the lump sum. Unless you have developed seriously reduced life expectancy you should go for the higher income.

The lump sum is taxed at the highest income tax rate you are on before taking the lump sum. That usually means 20% but it could be 0% if you take it in a year when your income is all within the personal allowance. This still doesn't make it a good deal compared to higher income except for those with reduced life expectancy.

kidmugsy

jamesd wrote: »

This still doesn't make it a good deal compared to higher income except for those with reduced life expectancy.

Could the extra pension be a good deal even for them if they have a widow to "inherit" most of the extra pension?

Hercules_Grytpype-Thynne

jem16 wrote: »

What does the reduced pension work out as?


£142 pw




As far as I understand it, any tax on the lump sum is worked out from your tax position. If you are a non-taxpayer, then the lump sum is tax-free.

However whether it's better to take the higher pension or a lump sum is another question.

Being totally green here - how can you be a non taxpayer?

Hercules_Grytpype-Thynne

jamesd wrote: »

Higher weekly pension is usually a far, far better deal compared to the low gain from the lump sum. Unless you have developed seriously reduced life expectancy you should go for the higher income.

The lump sum is taxed at the highest income tax rate you are on before taking the lump sum. That usually means 20% but it could be 0% if you take it in a year when your income is all within the personal allowance. This still doesn't make it a good deal compared to higher income except for those with reduced life expectancy.

Thank you jamesd, I think that is what I wanted to hear. I have good health, so will probably go for the higher pension, which also saves me the hassle of trying to find the best deal to invest the lump sum in - something that I am not experienced in at all.


You say "but it could be 0% if you take it in a year when your income is all with the personal allowance", but surely £36K would tip that way over the limit would it not? Or am in my
naivety missing something?

HarryD

Hercules_Grytpype-Thynne wrote: »

You say "but it could be 0% if you take it in a year when your income is all with the personal allowance", but surely £36K would tip that way over the limit would it not? Or am in my
naivety missing something?

Yes, you have missed the key point he was making: the lump sum does not count as additional income. So if your other income is below the tax threshold and you pay 0%, and your lump sum was £1M, you'd pay no income tax on the lump sum. Strange but true.

So for someone just below the 20% or just below the 40% threshold, taking pension as a lump sum can be a very good deal.

Also true for people with other income just below £100K. Over £100K the effective marginal rate is 60% on the next £20K, so taking pension later as a lump sum can reduce the tax rate on the pension money from 60% to 40%. Probably not many pensioners in this category though!

Hercules_Grytpype-Thynne

HarryD wrote: »

Yes, you have missed the key point he was making: the lump sum does not count as additional income. So if your other income is below the tax threshold and you pay 0%, and your lump sum was £1M, you'd pay no income tax on the lump sum. Strange but true.

Ah! Thank you I see now, I didn't realise when people spoke of a tax free lump sum that that is what they were referring to - that's very generous of them!


Just a shame that it doesn't apply in my case. :>(

HarryD

Hercules_Grytpype-Thynne wrote: »

Ah! Thank you I see now, I didn't realise when people spoke of a tax free lump sum that that is what they were referring to - that's very generous of them!

(

Well, not always tax free, just all taxed at the highest rate you pay on your other income.

jem16

Hercules_Grytpype-Thynne wrote: »

Being totally green here - how can you be a non taxpayer?

By having taxable income less than the personal allowance.