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Tax on lump sum

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Missmental2020Missmental2020 Forumite
4 posts
Hi, I am in the fortunate position to be completing my nhs pension form & im a bit confused . I wanted to take the largest lump sum , just over £100 k. It’s asking if I want to take the largest lump sum, may be eligible to pay tax or the largest amount tax free . I was always under the impression that my lump sum would be tax free and would pay tax on the monthly pension .
Please can anyone advise?
Many thanks.

Replies

  • Dazed_and_confusedDazed_and_confused Forumite
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    What exactly does it say?
  • It says:
    Do you want an additional lump sum by giving up part of you pension ?

    If yes do you want,
    A) the maximum additional lump sum , which may incur a tax charge.
    B) the maximum amount tax free or
    C) an additional amount less than the maximum amount permitted .
  • Dazed_and_confusedDazed_and_confused Forumite
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    That looks very much like there would be a tax charge because you would be exceeding the maximum tax free lump sum allowable.

    Do you actually want to take more than the standard amount?

    And if so do you want it take more than the maximum tax free amount?

    Have you considered the commutation factors?
  • crv1963crv1963 Forumite
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    Sixth Anniversary 1,000 Posts Name Dropper
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    It says:
    Do you want an additional lump sum by giving up part of you pension ?

    If yes do you want,
    A) the maximum additional lump sum , which may incur a tax charge.
    B) the maximum amount tax free or
    C) an additional amount less than the maximum amount permitted .

    I'm going for (B), but that is because we have a mortgage to clear and have other pension plans.

    Do you have a purpose for the maximum tax free amount or are taking it because you can? If you are in reasonable health and expect to remain so then the larger pension may be better for you.

    You are exchanging £1 of annual pension for £12 of lump sum- quite a poor rate if you haven't a need for the larger sum. If you expect to live for more than a further twelve years then in simple terms you get "more money" by taking the lower lump sum and higher pension income.
    CRV1963- Light bulb moment Sept 15- Planning the great escape- aka retirement!
  • Thanks for your replies . I am unsure what to do. I was always under the impression that the lump sum was tax free and we pay tax on the pension . I was wanting to buy a property abroad hopefully with the plan to move in the future .
    I will ask the pensions department tomorrow.
  • Dazed_and_confusedDazed_and_confused Forumite
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    This might help.

    https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/tax-and-the-cash-lump-sum

    As crv1963 says you should think carefully about taking a larger lump sum as this will permanently reduce your pension.
  • crv1963crv1963 Forumite
    1.4K posts
    Sixth Anniversary 1,000 Posts Name Dropper
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    Thanks for your replies . I am unsure what to do. I was always under the impression that the lump sum was tax free and we pay tax on the pension . I was wanting to buy a property abroad hopefully with the plan to move in the future .
    I will ask the pensions department tomorrow.

    Have you requested a pensions forecast? They give you reasonably accurate figures, do you have a partner/ spouse? If so what pension provision do they have?
    CRV1963- Light bulb moment Sept 15- Planning the great escape- aka retirement!
  • jimi_manjimi_man Forumite
    454 posts
    Ninth Anniversary 100 Posts
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    Hi, I am in the fortunate position to be completing my nhs pension form & im a bit confused . I wanted to take the largest lump sum , just over £100 k. It’s asking if I want to take the largest lump sum, may be eligible to pay tax or the largest amount tax free . I was always under the impression that my lump sum would be tax free and would pay tax on the monthly pension .
    Please can anyone advise?
    Many thanks.
    Hi. With public sector Defined Benefit pensions (the NHS scheme is such a pension) there can be a tax charge on the lump sum if the total exceeds 25% of the value of the pension. Technically there is no actual value of the pension since it pays out a set amount every year ad infinitum until death, however it's usually done by multiplying the yearly pension by 20 and adding the lump sum.

    The working out of 25% is a little opaque, but a ballpark figure can be obtained by dividing your pension 'value' by 4 and as long as your lump sum is nowhere near that, then it's fine. If it is then you may have to work it out more accurately to ensure you are not going over it. Or get your pensions dept to do it.

    As an example, if your yearly pension without lump sum is £30K, then the value is £30,000 x 20 = £600k, so as long as your lump sum is lower than £600k / 4 = £150K then you should be fine.
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