Tax & National Insurance

valio247

Hello everyone,
I am after some advice mainly regarding National Insurance - I am due to benefit from 4 deferred pensions on my 60th birthday which is later this year. I have accumulated approx. 30 years of pension benefits with these 4 different companies and all are defined benefits (LGPS) pensions.


Currently I work part-time and pay no tax or NI contributions and intent to continue working, however I know that once I take these benefits I will be liable to tax on my earnings (pension income+ wages).


What I would like to know is:


1. I know NI is not payable on my pensions but combined with my wages would I be liable to pay NI? I would still be under the NI threshold based on my wages only.


2. What 'formula' if any is used to calculate the maximum tax free lump sum?


Many thanks in anticipation.

bigfreddiel

Your pension income will be added to your earned income for tax purposes. So if over £11k you will be liable for tax

Your pension income is not liable for any NI so if your earned income isn't liable that will remain the same, pension income will not affect your current NI situation

LXdaddy

For how long have you not been paying NI contributions? Or more importantly, how many years of NI payments do you have? Have you got enough to fully qualify for your state pension when you reach that age?

robin61

A DB pension is an entitlement to a pension for life so they don' t have a fund value in the way a DC scheme has. So a ‘notional capital value’ for that pension entitlement has to be calculated.This is done by multiplying the annual level of scheme pension at outset by a factor of 20 . The maximum tax free PCLS will be 25% of that value.

So for example if your pension without a lump sum is £10k per annum
The value is 10x 20 = 200k
So you would be able to take a tax free lump sum of £50k. That would of course reduce your pension.

jamesd

Pensions are taxable income but they aren't subject to NI so there will be no change in your NI bill.

There is no single formula for the maximum tax free lump sum from defined benefit pensions, though it's 25% of pot value for defined contribution ones. Defined benefit types can have preserved rights to higher amounts and scheme rules that can modify that so the only way to know is to check with the scheme.

It is also often a bad move to take tax free lump sums from defined benefit pensions. Often the commutation rate of lump sum paid per Pound of lost income is poor and it's better to do something like borrow the money and repay from the higher income if you want a lump sum. This will be different for each scheme and some might offer a good deal. Public sector schemes tend to offer bad deals where taking the higher income is the better choice.

If no other way of doing it is available something like an equity release mortgage to get a lump sum then repaying it from the higher income would usually beat commuting a defined benefit pension.

valio247

Thanks for all the replies, very useful and interesting info. In reply to LXdaddy, a few weeks ago I acquired an updated NI contributions and currently have 41 years of full contributions with a few more years to before my State Pension age so not too many problems there. Again thanks for everyone's thoughts and input.