Query re. police pension commutation options

atw_uss

DH is shortly to retire with 30 full years service in the police. He has decided to take the lump sum and lower annual pension. However, now that the paperwork has arrived there are two options for the commutation:

• A: big lump sum, with some tax deducted on the line below (and to be paid by pension company/employer) + annual pension
• B: slighty smaller lump sum (about £10K less) that is completely tax free + slightly larger annual pension (about £750 pa more)
  

The explanation on the letter for Option A, and even the phone conversation he had is somewhat woolly. What he needs to know is whether the lump sum in A will be fully tax-free (once the tax - c.£7K - is paid by the employer), and if the top line figure is what will land in the bank account (and not subject to any further tax). He always thought the lump sum was tax free, so the two options are causing a bit of confusion. He does not risk exceeding the LTA. On the letter, this is noted as:

• Maximum lump sum after Tax
• Deduction for tax
• Reduced pension
• Percentage of LTA used

What I am wondering is if this has to do with breaching some upper tax free lump sum limit that we can't seem to find anywhere. The pension people weren't allowed to comment on whether there was any advantage of taking B over A.

Any advice appreciated from anyone in the know - DH will call the pension provider again before signing on the dotted line!

xylophone

https://www.yourpensionservice.org.uk/media/1716/police-scheme-commutation-guidance_31102018.pdf

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063240   example 8

Do  the above  throw any light?

Your husband can ask for an explanation in writing before signing on the dotted line - an explanation is not advice.

atw_uss

xylophone said:

https://www.yourpensionservice.org.uk/media/1716/police-scheme-commutation-guidance_31102018.pdf

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063240   example 8

Do  the above  throw any light?

Your husband can ask for an explanation in writing before signing on the dotted line - an explanation is not advice.

Thank you, xylophone - both documents look extremely useful, including example 8. From what I can see it looks like taking the maximum permitted lump sum exceeds the HMRC upper limit, triggering £7K worth of tax on this excess amount. There is a way of staying below this limit by taking less lump sum but having a slightly higher pension. I guess what he now needs to decide is which one makes more sense, i.e. whether the bigger lump sum and tax hit would be worth it.

Need to get my calculator out ...

Secret2ndAccount

atw_uss said:
I guess what he now needs to decide is which one makes more sense, i.e. whether the bigger lump sum and tax hit would be worth it. Need to get my calculator out ...

It's not worth it.  Do you really need that extra 10,000?  If he gives up the 10,000 he get's 750pa more. If he pays 20% tax, that's 600pa in your pocket. So, in 17 yrs, he has his money back, and that's not noting that inflation increases will make that 600/yr bigger each year. Hopefully, your husband expects to live a lot more than 17 years. Maybe when he's 85 he won't need the money, but hopefully at 70 he will still be well capable of enjoying the extra every month.
Unless you have a really good use for that 10,000...