Tax free lump sum

WYSPECIAL

I have a frozen final salary scheme which has the option for a tax free lump sum.

I also have a stakeholder scheme which I can take 25% tax free from and then pay tax on the rest as I withdraw it as lump sums.

Are these tax free lump sums completely independent of each other or would taking one limit the amount I could have tax free from the other?

If I take the final salary pension as soon as I can will it bring in the limit that is imposed on what you can contribute to a stakeholder scheme?

xylophone

See http://www.pruadviser.co.uk/content/knowledge/technical-centre/pension_commencement_lump_sum_tax_free_cash/


Taking a scheme pension does not trigger the MPAA.

http://www.pruadviser.co.uk/content/knowledge/technical-centre/money_purchase_annual_allowance_mpaa/

jennyjj

WYSPECIAL wrote: »

I have a frozen final salary scheme which has the option for a tax free lump sum.

I also have a stakeholder scheme which I can take 25% tax free from and then pay tax on the rest as I withdraw it as lump sums.

Are these tax free lump sums completely independent of each other or would taking one limit the amount I could have tax free from the other?

If I take the final salary pension as soon as I can will it bring in the limit that is imposed on what you can contribute to a stakeholder scheme?

They are independent. You can, almost certainly, draw one, contribute to the other and contribute to yet another, subject to the quite high lifetime allowance.

WYSPECIAL

jennyjj wrote: »

They are independent. You can, almost certainly, draw one, contribute to the other and contribute to yet another, subject to the quite high lifetime allowance.

So in theory I could draw my final salary one at age 55 and pay the income from it into a stakeholder scheme and gain extra tax relief until such time as I needed to draw that?

The final salary scheme has an option to commute some of the pension to a tax free lump sum. Having got some quotes the commutation rate at age 55 is £20 lump sum for every £1 of pension given up.

Am I correct in thinking this rate is pretty rubbish and better to take more indexed linked (and taxable) income and hope I live long enough for it to balance out in my favour?

MallyGirl

You cannot contribute more than your earned income to a pension (apart from the £3600 gross that everyone can do). Pension income is not earned income so you would need to still be pulling in salary alongside these pensions to do what you want

jerrysimon

Doesn't pensioning recycling come into play here ?

Although it seems very few if any cases have been made.

jamesd

There's no restriction specific to pension income, just the pay or annual allowance. There are limits to how much tax free lump sum can be recycled but those can be ample.

jamesd

WYSPECIAL wrote: »

I also have a stakeholder scheme which I can take 25% tax free from and then pay tax on the rest as I withdraw it as lump sums.

Are these tax free lump sums completely independent of each other or would taking one limit the amount I could have tax free from the other?

If I take the final salary pension as soon as I can will it bring in the limit that is imposed on what you can contribute to a stakeholder scheme?

The two share the same limit, the lifetime allowance. You're only entitled to up to 25% of the lifetime allowance in the normal tax free lump sums. So yes, the DB pension can limit or eliminate the ability to take a tax free lump sum from the other one.

xylophone provided relevant links.

Given the calculation rules, a DB pension of £50,000 a year (or lump sum plus 20 * income) would use the full million Pound lifetime allowance and eliminate the whole tax free lump sum from other pensions.

For this reason it can sometimes be best to take a DB pension as soon as possible. There will be an actuarial reduction in income and lump sum that reduces the amount of lifetime allowance used. You get the reduced pension for more years but that isn't part of the lifetime allowance calculation, so it's just a gain for you.

jamesd

WYSPECIAL wrote: »

If I take the final salary pension as soon as I can will it bring in the limit that is imposed on what you can contribute to a stakeholder scheme?

No. DB income can be taken without triggering the money purchase annual allowance that cuts the annual allowance from £40,000 to £4,000. You're also limited by gross pay if that's lower. If the MPAA is triggered you can no longer carry forward unused allowance from the previous three years. There's no carrying forward of pay to allow more, ever, even without thhe MPAA.

jamesd

WYSPECIAL wrote: »

I also have a stakeholder scheme which I can take 25% tax free from and then pay tax on the rest as I withdraw it as lump sums.

No problem to take the tax free lump sum and put the rest into flexi-access drawdown. But as soon as you take even a penny of taxable money from a flexi-access drawdown portion you trigger the money purchase annual allowance. You also trigger it if you take a 25% tax free and 75% taxable UFPLS type of lump sum.

It is possible to take some taxable money using the small pots rule up to three times in your life without triggering the MPAA. This rule lets you take up to £10,000 and it must be all of the money in that specific pension arrangement as well.

kidmugsy

WYSPECIAL wrote: »

the final salary scheme has an option to commute some of the pension to a tax free lump sum. Having got some quotes the commutation rate at age 55 is £20 lump sum for every £1 of pension given up.

Am I correct in thinking this rate is pretty rubbish?

Suppose you live another 30 years. You get £20 but have given up an after-tax £30 x 0.8 = £24. I'd prefer the lump sum EXCEPT that your future income would have been inflation-protected whereas your lump sum might not be, depending on your investment success.