Defined Benefit pension Lump Sum and tax

Deetheak

My Husband turns 60 next month and has an old local government pension due.  Has been offered to commute part of his retirement pension "to receive the highest possible Lump sum retirement grant allowed by HM Revenue and Customs".  He is self employed and will possibly be paying 40% tax for the relevant tax year.  He knows will pay tax on the monthly pension but will he have to pay tax at all on the lump sum.  Phoned HMRC who told me only 25% of this lump sum is tax free and when I queried it put me on hold, came back to me and then promptly cut me off.. 

drummersdale

I think the lump sum is tax free or should I say I’m hoping it is as I’m looking to take my Classic CS pension lump sum next year…..this is what it says in respect of that “ Your retirement lump sum is tax-free, subject to the Lifetime Allowance, but your pension is treated as earned income. Any income tax due under the tax code notified by HMRC will be deducted by the pension payroll provider. Deductions may be provisional until they have received the proper code” hopefully in your husband’s case the local government one is the same.

Dazed_and_C0nfused

There is no 25% TFLS with a DB pension, there is a Pension Commencement Lump Sum.

This is based on the scheme rules (which must adhere to legislation).

Any PCLS is tax free.

Deetheak

Dazed_and_C0nfused said:

There is no 25% TFLS with a DB pension, there is a Pension Commencement Lump Sum.

This is based on the scheme rules (which must adhere to legislation).

Any PCLS is tax free.

Thanks thought it wouldn't be taxed but my phone call to HMRC just confused me

Sandtree

Tax Free Cash Lump Sum is normally 25% of the value of the pension but you must have enough lifetime allowance to be able to get it all tax free. Most do and most opt for the full 25% rather than leaving it in the fund for a higher lifetime pension

Dazed_and_C0nfused

Deetheak said:

Dazed_and_C0nfused said:

There is no 25% TFLS with a DB pension, there is a Pension Commencement Lump Sum.

This is based on the scheme rules (which must adhere to legislation).

Any PCLS is tax free.

Thanks thought it wouldn't be taxed but my phone call to HMRC just confused me

Maybe they thought you were referring to a DC pension?

Or just didn't know enough to answer correctly 

Albermarle

Tax Free Cash Lump Sum is normally 25% of the value of the pension

That only applies to DC pension pots .

The OP is asking about a Defined Benefit scheme and a previous poster already explained

There is no 25% TFLS with a DB pension, there is a Pension Commencement Lump Sum.

This is based on the scheme rules (which must adhere to legislation).

Albermarle

Deetheak said:

My Husband turns 60 next month and has an old local government pension due.  Has been offered to commute part of his retirement pension "to receive the highest possible Lump sum retirement grant allowed by HM Revenue and Customs".  He is self employed and will possibly be paying 40% tax for the relevant tax year.  He knows will pay tax on the monthly pension but will he have to pay tax at all on the lump sum.  Phoned HMRC who told me only 25% of this lump sum is tax free and when I queried it put me on hold, came back to me and then promptly cut me off.. 

He should be aware that giving up annual pension income for a lump sum is not always a good deal .
Especially if the commutation rate ( lump sum /divided by annual pension given up ) is  less than 20 . Local Government pension often only have a commutation rate of 12 , which is poor.

Sandtree

Albermarle said:

Tax Free Cash Lump Sum is normally 25% of the value of the pension

That only applies to DC pension pots .

The OP is asking about a Defined Benefit scheme and a previous poster already explained

There is no 25% TFLS with a DB pension, there is a Pension Commencement Lump Sum.

This is based on the scheme rules (which must adhere to legislation).

Ok, have seen advisors refer to both DC and DB as a tax free cash lump sum but that could be lax wording from them, unless it changes again if the pension becomes a deferred annuity?

Silvertabby

Yes, the commutation rate of 1 :12 isn't good, but in this case it's maximum tax free cash versus maximum pension that would be taxed at 40%.

Deferring the payment wouldn't work - increases for late payment only kick in from the scheme NRA (65) so OP's husband would just be foregoing up to 5 years of pension payments.

Albermarle

Ok, have seen advisors refer to both DC and DB as a tax free cash lump sum but that could be lax wording from them

Both DB and DC have the facility to pay a tax free lump sum .

With the DC it is 25% , with the DB it is a figure calculated by the scheme .