Tax on pension

Tedmaul_2

My mum took the option of a lump sum of £32,000 tax free from her works pension.  She has received that money in her bank account.  She has then received a pension payslip saying tax deductions of 13,000? Is this amount going to be clawed back from her in some way?

Dazed_and_C0nfused

On what basis did she think it was "tax free"?

Was it a TFLS or PCLS?

Has she checked her Personal Tax Account to see what taxable income the pension company has reported to HMRC?

£13,000 tax is the amount which be deducted from a first taxable payment of £32709

molerat

More information needed.  What type of lump sum was it ?  If commuting the whole pension to a lump sum then it is taxable and the pension co should have already taken the tax off, they would not pay out first and tax later.

Tedmaul_2

Dazed_and_C0nfused said:

On what basis did she think it was "tax free"?

Was it a TFLS or PCLS?

Has she checked her Personal Tax Account to see what taxable income the pension company has reported to HMRC?

I'm  pretty sure she thought it would be tax free as i think the form said either a lump sum tax free amount and a lower annual pension or no tax free amount and a higher annual pension?

comeandgo

So she was expecting 32,000 and she received 32,000?

xylophone

What exactly did the letter from the scheme administrator say in respect of your mother's pension options?

TVAS

The fact that the son has come to this forum instead of the mother suggests the latter does not understand pension correspondence it it does not sound like the payment was 100% tax free but taxable in part or in whole. More more information is needed. 

Marcon

Tedmaul_2 said:

My mum took the option of a lump sum of £32,000 tax free from her works pension.  She has received that money in her bank account.  She has then received a pension payslip saying tax deductions of 13,000? Is this amount going to be clawed back from her in some way?

This is from her defined benefit company scheme as opposed to her Fidelity defined contribution scheme by the sound of things.

If she's received £32K as a tax free lump sum, then it will remain tax free. Two possibilities:

1. could the payslip actually be a final payslip from her employer (not unknown for the pension payroll to show the same name!)
2. error.

Go back to the scheme and check - anything here is just guesswork.

Secret2ndAccount

Is this a pension from years ago? If so, it's likely to be a defined benefit or DB or 'final salary' pension. They still have them in government, NHS, police, ...   If it's private sector, and more recent, then it's likely a defined contributions or DC pension. With a DC pension your contributions go into your own personal pot, so it's pretty easy to see how much you've got when you retire. With DB, you don't have your own pot. There is one huge pot (or in the case of government, no pot at all) which is used to pay everyone's pension. There are rules which look at some kind of average of your salary over a number of years so that you get a fair amount out as a pension.

If it's a DC pension, you can take up to 25% of the pot as a tax free lump some - TFLS. Take any more and it's treated as income, so likely to lead to some income tax.

If it's a DB pension, there is still a lump sum, calculated according to the specific rules of your scheme. It's called a pension commencement lump sum or PCLS. It is tax free. After that, any pension is treated as income, so likely to lead to some income tax.

Having said all this you are none the wiser if you can't get a look at a statement or letter of some kind which explains what your mother's payment consists of.

If, for example, your mother had a DC pension with a total pot of 32,000, and took it all, then 8,000 would be tax free, and 24,000 would be taxable. 13,000 is a lot of tax to pay on 24,000 income, but it's possible. The taxman doesn't know that this is a one-off payment. He would assume she is going to be earning 24k per month for the rest of the year. Then you get a very big tax bill, but you can get the excess tax back once the end of the tax year rolls around.

Have a chat with your mother about what she and her employer were contributing to her pension and for how long. Maybe you can decide whether 32k sounds like all of her pension pot or 25% of it.

dunstonh

Tedmaul_2 said:

My mum took the option of a lump sum of £32,000 tax free from her works pension.  She has received that money in her bank account.  She has then received a pension payslip saying tax deductions of 13,000? Is this amount going to be clawed back from her in some way?

The 25% tax free lump sum does not get processed by payroll.  The 75% taxable segment does get processed by payroll and a payslip would cover that bit.   So, the fact she has a payslip fro the pension provider suggests that she drew against the taxable segment and not just the tax free segment.

Tedmaul_2

Unfortunately the paper work was sent back to the pension provider.  Probably best if she rings the pension company about it now.  It was a closed defined benefit scheme from a private company. She has received the full 32,000 but  looks as if £13,000 could be clawed back in tax at a later date then?