Taxation of pension income

Viking64

I have a defined benefits staff pension which I am not yet taking. I left service in 96. I have not added to it.

When you take a pension, I gather a 25pc lump sum is tax free. Income from the 75pc is taxable. I read that tax is deducted before it's paid.

So is it all taxed before you buy an annuity? Or is it just the income from the annuity that is taxed?

Secondly, if you have another source of income, does your pension income form part of overall income for the purposes of tax? Eg 5000 earned, 5000 income= no tax to pay? (Below personal allowance)

Thanks friends...:beer:

Dazed_and_confused

Your post is a bit confusing.

After any TFLS the remaining pension income is taxable.

Tax deducted from this depends on the tax code in place. The first one or two payments may have too much of insufficient tax deducted until HMRC send the pension company the correct tax code.

Where does the annuity come from? Do you have a defined benefit pension and a defined contribution pot?

Your pension income is part of your overall taxable income. So if your total taxable income is say £10,000 then no tax would be due normally.

State Pension is taxable once you start to receive it.

sandsy

You seem confused.

25% tax free lump sums and annuities come out of defined contribution pension pots. Defined contribution pension pots are the amount acquired by investing contributions (employer and employee) in assets such as funds (which themselves are invested in the stock market) after paying a pension provider and fund managers for managing the pension and the funds.

But you have a defined benefit pension. A defined benefit pension pays you a set level of income, no matter what you paid in, for the rest of your life. Not only will it usually increase each year with inflation, it usually pays a partial pension to a surviving spouse if they outsurvive you. The employer who sponsors the scheme is responsible for any shortfall in the funds available to meet that pension and for paying costs to professionals to manage the assets of the scheme. Although you can usually take a tax free lump sum, you'll have take a reduced level of income and the formula for the reduction is set by the rules of the scheme.

Silvertabby

If this really is a DB scheme, then it may not be possible to take 25% of the notional value by commuting (ie, giving up some of the pension in return for a tax free lump sum). It depends on the scheme rules.

No need to buy an annuity with the rest - you'll get a pre-determined pension based on your final salary, length of service - and scheme rules.

Taxation of your pension depends on the tax code applied. It is usual for your first pension payment to be made using some form of emergency tax code, until you speak to the tax man and they in turn supply your pensions provider with a tax code to work from. Your pension will be taxable income and so your eventual tax codings will reflect that.

AnotherJoe

Viking64 wrote: »

I have a defined benefits staff pension which I am not yet taking. I left service in 96. I have not added to it.

When you take a pension, I gather a 25pc lump sum is tax free. Income from the 75pc is taxable. I read that tax is deducted before it's paid.

So is it all taxed before you buy an annuity? Or is it just the income from the annuity that is taxed?

Secondly, if you have another source of income, does your pension income form part of overall income for the purposes of tax? Eg 5000 earned, 5000 income= no tax to pay? (Below personal allowance)

Thanks friends...:beer:

You misunderstand big time. Yes tax will be deducted but only if its due ! Its not just deducted irrespective. (this is all aside initial tax and getting the right tax code)

Also, a 25% tax free lump sum is not a "given" which you imply. Depends on the pension scheme and any options you may decide to take.

Finally, if you have a Defined Benefit pension then what that pays out is your pension. There's no annuity. An annuity is a pension you buy with a lump sum.

And yes your pension(s) including State Pension form part of your overall taxable income.

Viking64

Yes. I was confused. But you guys have cleared it up. So no lump sum from any defined benefits scheme and income just appears automatically...no need to buy an annuity. And taxable along the same lines as any other income.

GibbsRule_No3.

You may still be confused, as someone mentioned, it depends on your pension rules, you still may be entitled to take a lump sum and the rest will be paid monthly until you die. My DB suggested an amount but it was up to me if I wanted to take less lump sum and have more paid monthly.

Viking64

Ah. That explains it. My partner has a db scheme with a lump sum payout.