Lump sum and tax liability query

CharlieR_2

Greetings all. I hope someone will be able to help me with some advice or point me in the right direction.
My wife has just retired, age 68. She was working for the NHS for 15 years and has taken a lump sum from the NHS pension to clear credit card debt and treat herself (and me). Is the lump sum subject to income tax in the current FY, and if so to what extent? She will continue to receive a monthly pension from what is left in the pot.

Also, as she has not taken her state pension which was due at age 60, there is an amount there, some of which can be taken as a lump sum. I am not sure how much of this taxable. She has been told that she can either elect to have it paid this FY, or 2016/17 - decision to be made by end February. She hasn't made up her mind whether she will take the lump sum or not.

Any advice would be greatly appreciated. Many thanks.

kidmugsy

As the great dunstonh would say, we don't give advice we only give opinions. On the NHS scheme: if it's the usual DB pension deal, the lump sum will be tax-free. She should check with the scheme.

As for her State Pension lump sum: she'll have to pay tax on it at her highest tax rate for the FY in which she accepts it. So if in this tax year she's in the 20% band, she will pay at 20%; if in the 40% band, 40%. The point is that the lump sum is not treated as forcing her into a higher band.

Now, how big is her NHS pension? Because if it (plus any other income) doesn't fill up her Personal Allowance (versus income tax) - and that will be £11k p.a. in 16/17 - there's a way that she could take the lump sum without paying any tax on it at all. Details on application.

If it's not possible for her to avoid income tax on that State Pension lump sum she should give serious thought to refusing the lump sum and taking extra state pension instead. It's remarkable value to do this.

CharlieR_2

Many thanks kidsmugsy. Very useful 'opinions'

In your third para you state that there may be a way in which she could avoid paying tax on her NHS lump sum, although she has alrady received this in FY 15/16. "Details on application", you wrote, but I fear we may be too late. Re-reading your first para, we'll check the tax position with the scheme as well.

Anticipated state pension lump sum is 37,927. If not taken as lump sum it will be paid at 76.78 a week, in addition to state pension of 92.96. I thought I had read somewhere that it was possible to take up to 25 percent of the lump sum tax free.

If this weren't complicated enough (for me anyway) she will also be entitled to some pension from earnings in France and we are in touch with the International Pensions Centre.

I'm a bit nervous about continuing this thread in the public arena. Is there any way of takng it 'off line'?

Your continued opinions wuld be very welcome. Many thanks.

xylophone

The PCLS from NHS wouldn't normally have been taxable - are you sure that it was?

http://www.nhsbsa.nhs.uk/Documents/Pensions/Pension_Commutation_Member_FAQs_.pdf

Doesn't KM mean that if your wife's income in 2016-17 is less than her tax free allowance of £11,000, her marginal rate of tax would be 0%?

See http://taxaid.org.uk/guides/information/rental-income-savings-income-and-pensioner-issues/pensioners/deferring-state-pension

kidmugsy

xylophone wrote: »

Doesn't KM mean that if your wife's income in 2016-17 is less than her tax free allowance of £11,000, her marginal rate of tax would be 0%?

Exactly; then it would be a matter of careful timing of taking the lump sum, or of taking it early and then deferring the pension again, at least into the next tax year. But if the OP's wife is unavoidably a 20% tax payer, then I don't know of a way of getting it tax-free.

kidmugsy

CharlieR wrote: »

She has been told that she can either elect to have it paid this FY, or 2016/17 - decision to be made by end February.

She's been told wrong. It's entirely up to her when she restarts her State Pension. It may be that what was meant was that if she wants it this FY she must ask for it by end Feb.

neilvw

CharlieR wrote: »

lIn your third para you state that there may be a way in which she could avoid paying tax on her NHS lump sum, although she has alrady received this in FY 15/16. "Details on application", you wrote, but I fear we may be too late. Re-reading your first para, we'll check the tax position with the scheme as well.

KM was referring to avoiding tax on the State Pension lump sum option.