Advice for taking small work pension.

steve808

Hi, I'm hoping to get some advice on behalf of my mum and dad. 

They're happily married and are mortgage free. My dad is 72 (retired), gets a full state pension and is getting a good monthly amount from his workplace pension (enough money for them both to live comfortably on until the end of their days).

My mum is 64 and semi retired (She currently just does a bit of cleaning, self employed and ears around £2,000 a year). 
She has a workplace pension worth around £30,000 which she hasn't taken at all yet. 
Taking this monthly would result in very small monthly payments, and therefore she really just wants to get it all out in one lump sum.

So, the question is how much tax would she have to pay on this? I'm thinking that she won't pay tax on the first £12,500 (personal allowance), but she will still earn £2,000 from her work this year so,
£30,000 pension + £2,000 earnings = £32,000 - £12,500 (tax free allowance) = £19,500 left to be taxed? at 20%?

Also, Next year she will be also be getting the state pension. So is it best to take the full lump some now, while her income is so low? I assume once she's getting her state pension that would eat into more of her personal allowance and then she'd have to pay tax on more of the lump sum?

I'm sure there's plenty I'm missing / wrong about, so I'd appreciate it someone can give me some advice on how it actually works. Thanks in advance.  

Albermarle

Your tax calculation is not correct as if she did want to take it as a lump sum, 25% of it would be tax free.
So it should be £22.5K + £2K = £24.5K minus personal allowance of £12,500 ( actually £12570) = £12K taxable at 20% = £2.4K in tax 
She has a workplace pension worth around £30,000 which she hasn't taken at all yet. 
Taking this monthly would result in very small monthly payments, and therefore she really just wants to get it all out in one lump sum.
I am presuming this is a DC pension ( i.e. not a DB/final salary scheme) and there is an actual pot of money there of £30K.
In this case the pension does not have be paid in monthly payments and could for example be paid in tranches , say a lump sum once a year for 5 years for example, to spread it out. It might be necessary to transfer the pension out to do this though, as older pensions have less flexibility.

If it is a DB/final salary scheme then that changes everything.

steve808

Albermarle said:

Your tax calculation is not correct as if she did want to take it as a lump sum, 25% of it would be tax free.
So it should be £22.5K + £2K = £24.5K minus personal allowance of £12,500 ( actually £12570) = £12K taxable at 20% = £2.4K in tax 
She has a workplace pension worth around £30,000 which she hasn't taken at all yet. 
Taking this monthly would result in very small monthly payments, and therefore she really just wants to get it all out in one lump sum.
I am presuming this is a DC pension ( i.e. not a DB/final salary scheme) and there is an actual pot of money there of £30K.
In this case the pension does not have be paid in monthly payments and could for example be paid in tranches , say a lump sum once a year for 5 years for example, to spread it out. It might be necessary to transfer the pension out to do this though, as older pensions have less flexibility.

If it is a DB/final salary scheme then that changes everything.

Ah yes the 25% tax free, I'd forgotten about that. Thank you very much.

I believe it is a DC pension, it's quite an old one, she hasn't actually paid into it on over 15 years. The statement gives her 3 options. I don't have the paperwork with me, but it's roughtly
1. £1,200 a year,
2. £6,000 tax free lump sum and then £850 a year
3. £30,000 'Trivial Commutation' lump sum.

I'm not sure what 'trivial commutation' means.

Dazed_and_C0nfused

I suspect you are overlooking one thing, based on your original post it's quite likely your mum has a reduced Personal Allowance of £11,310 rather than £12,570.

The only way you can understand the most tax efficient way to get the £22,500 pension money is to methodically work through her expected taxable income over the next few years and then see what spare Personal Allowance she has.

2022:23 - taxable earnings £2,000?
2023:24 - taxable earnings £2,000(?) + part years State Pension of £X
2024:25 - taxable earnings £2,000(?) + full years State Pension of £X

There could be a big difference tax wise between taking it in one go and spreading it over 3-4 years.

NedS

steve808 said:

Albermarle said:

Your tax calculation is not correct as if she did want to take it as a lump sum, 25% of it would be tax free.
So it should be £22.5K + £2K = £24.5K minus personal allowance of £12,500 ( actually £12570) = £12K taxable at 20% = £2.4K in tax 
She has a workplace pension worth around £30,000 which she hasn't taken at all yet. 
Taking this monthly would result in very small monthly payments, and therefore she really just wants to get it all out in one lump sum.
I am presuming this is a DC pension ( i.e. not a DB/final salary scheme) and there is an actual pot of money there of £30K.
In this case the pension does not have be paid in monthly payments and could for example be paid in tranches , say a lump sum once a year for 5 years for example, to spread it out. It might be necessary to transfer the pension out to do this though, as older pensions have less flexibility.

If it is a DB/final salary scheme then that changes everything.

Ah yes the 25% tax free, I'd forgotten about that. Thank you very much.

I believe it is a DC pension, it's quite an old one, she hasn't actually paid into it on over 15 years. The statement gives her 3 options. I don't have the paperwork with me, but it's roughtly
1. £1,200 a year,
2. £6,000 tax free lump sum and then £850 a year
3. £30,000 'Trivial Commutation' lump sum.

I'm not sure what 'trivial commutation' means.

That sounds more like a Defined Benefits (DB) pension.

steve808

Dazed_and_C0nfused said:

I suspect you are overlooking one thing, based on your original post it's quite likely your mum has a reduced Personal Allowance of £11,310 rather than £12,570.

The only way you can understand the most tax efficient way to get the £22,500 pension money is to methodically work through her expected taxable income over the next few years and then see what spare Personal Allowance she has.

2022:23 - taxable earnings £2,000?
2023:24 - taxable earnings £2,000(?) + part years State Pension of £X
2024:25 - taxable earnings £2,000(?) + full years State Pension of £X

There could be a big difference tax wise between taking it in one go and spreading it over 3-4 years.

Thank you, the reduced personnel allowance doesn't seem like much less than the full one, so would only be a couple hundred more tax to pay? She wouldn't really be worried about that. J know she has paid to top up national insurance to make sure she gets full state pension.

She'd be happy to take it over 3-4 years like you say, but that isn't one of the options of her statement. (see above)

Silvertabby

NedS said:

steve808 said:

Albermarle said:

Your tax calculation is not correct as if she did want to take it as a lump sum, 25% of it would be tax free.
So it should be £22.5K + £2K = £24.5K minus personal allowance of £12,500 ( actually £12570) = £12K taxable at 20% = £2.4K in tax 
She has a workplace pension worth around £30,000 which she hasn't taken at all yet. 
Taking this monthly would result in very small monthly payments, and therefore she really just wants to get it all out in one lump sum.
I am presuming this is a DC pension ( i.e. not a DB/final salary scheme) and there is an actual pot of money there of £30K.
In this case the pension does not have be paid in monthly payments and could for example be paid in tranches , say a lump sum once a year for 5 years for example, to spread it out. It might be necessary to transfer the pension out to do this though, as older pensions have less flexibility.

If it is a DB/final salary scheme then that changes everything.

Ah yes the 25% tax free, I'd forgotten about that. Thank you very much.

I believe it is a DC pension, it's quite an old one, she hasn't actually paid into it on over 15 years. The statement gives her 3 options. I don't have the paperwork with me, but it's roughtly
1. £1,200 a year,
2. £6,000 tax free lump sum and then £850 a year
3. £30,000 'Trivial Commutation' lump sum.

I'm not sure what 'trivial commutation' means.

That sounds more like a Defined Benefits (DB) pension.

Definitely a DB (final salary) scheme.

To be eligible for trivial commutation, the amount offered must be under £30K AND OP's mum must not have any other pension benefits (other than the State pension) which would take her over the £30K limit.

If taken, 25% of the trivial commutation lump sum would be tax free, and it is likely that the pension provider will automatically deduct tax from the remaining 75%.  OP's mum will then have to apply to HMRC for a tax refund, if applicable.

Taking the lump sum wipes out all other pension benefits from the fund, including a spouse's pension should she predecease her husband.

One point - mentions that this lady is due her State pension 'next year' but if she is 64 now, then her State pension age will be 66.

Albermarle

steve808 said:

Albermarle said:

Your tax calculation is not correct as if she did want to take it as a lump sum, 25% of it would be tax free.
So it should be £22.5K + £2K = £24.5K minus personal allowance of £12,500 ( actually £12570) = £12K taxable at 20% = £2.4K in tax 
She has a workplace pension worth around £30,000 which she hasn't taken at all yet. 
Taking this monthly would result in very small monthly payments, and therefore she really just wants to get it all out in one lump sum.
I am presuming this is a DC pension ( i.e. not a DB/final salary scheme) and there is an actual pot of money there of £30K.
In this case the pension does not have be paid in monthly payments and could for example be paid in tranches , say a lump sum once a year for 5 years for example, to spread it out. It might be necessary to transfer the pension out to do this though, as older pensions have less flexibility.

If it is a DB/final salary scheme then that changes everything.

Ah yes the 25% tax free, I'd forgotten about that. Thank you very much.

I believe it is a DC pension, it's quite an old one, she hasn't actually paid into it on over 15 years. The statement gives her 3 options. I don't have the paperwork with me, but it's roughtly
1. £1,200 a year,
2. £6,000 tax free lump sum and then £850 a year
3. £30,000 'Trivial Commutation' lump sum.

I'm not sure what 'trivial commutation' means.

Trivial Commutation means they can take all their defined benefits, collective money purchase pension benefits and any in-payment money purchase in-house scheme pension as a lump sum
Trivial lump sums - Royal London for advisers

As Neds says it looks more like a DB scheme, so I think you need to look into the details a bit further.

steve808

Silvertabby said:

NedS said:

steve808 said:

Albermarle said:

Your tax calculation is not correct as if she did want to take it as a lump sum, 25% of it would be tax free.
So it should be £22.5K + £2K = £24.5K minus personal allowance of £12,500 ( actually £12570) = £12K taxable at 20% = £2.4K in tax 
She has a workplace pension worth around £30,000 which she hasn't taken at all yet. 
Taking this monthly would result in very small monthly payments, and therefore she really just wants to get it all out in one lump sum.
I am presuming this is a DC pension ( i.e. not a DB/final salary scheme) and there is an actual pot of money there of £30K.
In this case the pension does not have be paid in monthly payments and could for example be paid in tranches , say a lump sum once a year for 5 years for example, to spread it out. It might be necessary to transfer the pension out to do this though, as older pensions have less flexibility.

If it is a DB/final salary scheme then that changes everything.

Ah yes the 25% tax free, I'd forgotten about that. Thank you very much.

I believe it is a DC pension, it's quite an old one, she hasn't actually paid into it on over 15 years. The statement gives her 3 options. I don't have the paperwork with me, but it's roughtly
1. £1,200 a year,
2. £6,000 tax free lump sum and then £850 a year
3. £30,000 'Trivial Commutation' lump sum.

I'm not sure what 'trivial commutation' means.

That sounds more like a Defined Benefits (DB) pension.

Definitely a DB (final salary) scheme.

To be eligible for trivial commutation, the amount offered must be under £30K AND OP's mum must not have any other pension benefits (other than the State pension) which would take her over the £30K limit.

If taken, 25% of the trivial commutation lump sum would be tax free, and it is likely that the pension provider will automatically deduct tax from the remaining 75%.  OP's mum will then have to apply to HMRC for a tax refund, if applicable.

Taking the lump sum wipes out all other pension benefits from the fund, including a spouse's pension should she predecease her husband.

One point - mentions that this lady is due her State pension 'next year' but if she is 64 now, then her State pension age will be 66.

Ok so definitely a DB, thanks.
The last statement we have was actually 4 years ago and the total was around £28,000, so I'm thinking it could have grown to be close to or even just over £30k now. It sounds like this will make a big difference if its over or under? What happens if it's just over £30,000?

She doesn't have any other pensions. She's not worried about losing the other pension benefits, like spouces pension, because my Dad already gets more than enough from his own pensions to cover himself if her death preceeded hers.

She is 65 in March so will be 66 next year and start getting State pension as I understand it.

Marcon

steve808 said:

Silvertabby said:

NedS said:

steve808 said:

Albermarle said:

Your tax calculation is not correct as if she did want to take it as a lump sum, 25% of it would be tax free.
So it should be £22.5K + £2K = £24.5K minus personal allowance of £12,500 ( actually £12570) = £12K taxable at 20% = £2.4K in tax 
She has a workplace pension worth around £30,000 which she hasn't taken at all yet. 
Taking this monthly would result in very small monthly payments, and therefore she really just wants to get it all out in one lump sum.
I am presuming this is a DC pension ( i.e. not a DB/final salary scheme) and there is an actual pot of money there of £30K.
In this case the pension does not have be paid in monthly payments and could for example be paid in tranches , say a lump sum once a year for 5 years for example, to spread it out. It might be necessary to transfer the pension out to do this though, as older pensions have less flexibility.

If it is a DB/final salary scheme then that changes everything.

Ah yes the 25% tax free, I'd forgotten about that. Thank you very much.

I believe it is a DC pension, it's quite an old one, she hasn't actually paid into it on over 15 years. The statement gives her 3 options. I don't have the paperwork with me, but it's roughtly
1. £1,200 a year,
2. £6,000 tax free lump sum and then £850 a year
3. £30,000 'Trivial Commutation' lump sum.

I'm not sure what 'trivial commutation' means.

That sounds more like a Defined Benefits (DB) pension.

Definitely a DB (final salary) scheme.

To be eligible for trivial commutation, the amount offered must be under £30K AND OP's mum must not have any other pension benefits (other than the State pension) which would take her over the £30K limit.

If taken, 25% of the trivial commutation lump sum would be tax free, and it is likely that the pension provider will automatically deduct tax from the remaining 75%.  OP's mum will then have to apply to HMRC for a tax refund, if applicable.

Taking the lump sum wipes out all other pension benefits from the fund, including a spouse's pension should she predecease her husband.

One point - mentions that this lady is due her State pension 'next year' but if she is 64 now, then her State pension age will be 66.

Ok so definitely a DB, thanks.
The last statement we have was actually 4 years ago and the total was around £28,000, so I'm thinking it could have grown to be close to or even just over £30k now. It sounds like this will make a big difference if its over or under? What happens if it's just over £30,000?

She doesn't have any other pensions. She's not worried about losing the other pension benefits, like spouces pension, because my Dad already gets more than enough from his own pensions to cover himself if her death preceeded hers.

She is 65 in March so will be 66 next year and start getting State pension as I understand it.

Two things happen: she won't be able to 'trivially commute' the lot; and if she wants to transfer out to a defined contribution scheme to enable her to 'flexibly access' her benefits, she will have to pay for financial advice (£5K+ for the advice) before the DB scheme can pay the transfer.

Given the way DB transfers have dropped in recent months, it's quite possible that it will be under the £30K mark. The only way to find out is for her to make a request to the scheme for an updated Cash Equivalent Transfer Value, assuming she is still able to transfer out. There is only a statutory right to a transfer up until one year before reaching the scheme's normal retirement age, but if she hasn't started to draw her scheme benefits, she may be able to make  a non-statutory transfer - depends what the trustees/the rules of the scheme permit.

Silvertabby

steve808 said:

Silvertabby said:

NedS said:

steve808 said:

Albermarle said:

Your tax calculation is not correct as if she did want to take it as a lump sum, 25% of it would be tax free.
So it should be £22.5K + £2K = £24.5K minus personal allowance of £12,500 ( actually £12570) = £12K taxable at 20% = £2.4K in tax 
She has a workplace pension worth around £30,000 which she hasn't taken at all yet. 
Taking this monthly would result in very small monthly payments, and therefore she really just wants to get it all out in one lump sum.
I am presuming this is a DC pension ( i.e. not a DB/final salary scheme) and there is an actual pot of money there of £30K.
In this case the pension does not have be paid in monthly payments and could for example be paid in tranches , say a lump sum once a year for 5 years for example, to spread it out. It might be necessary to transfer the pension out to do this though, as older pensions have less flexibility.

If it is a DB/final salary scheme then that changes everything.

Ah yes the 25% tax free, I'd forgotten about that. Thank you very much.

I believe it is a DC pension, it's quite an old one, she hasn't actually paid into it on over 15 years. The statement gives her 3 options. I don't have the paperwork with me, but it's roughtly
1. £1,200 a year,
2. £6,000 tax free lump sum and then £850 a year
3. £30,000 'Trivial Commutation' lump sum.

I'm not sure what 'trivial commutation' means.

That sounds more like a Defined Benefits (DB) pension.

Definitely a DB (final salary) scheme.

To be eligible for trivial commutation, the amount offered must be under £30K AND OP's mum must not have any other pension benefits (other than the State pension) which would take her over the £30K limit.

If taken, 25% of the trivial commutation lump sum would be tax free, and it is likely that the pension provider will automatically deduct tax from the remaining 75%.  OP's mum will then have to apply to HMRC for a tax refund, if applicable.

Taking the lump sum wipes out all other pension benefits from the fund, including a spouse's pension should she predecease her husband.

One point - mentions that this lady is due her State pension 'next year' but if she is 64 now, then her State pension age will be 66.

Ok so definitely a DB, thanks.
The last statement we have was actually 4 years ago and the total was around £28,000, so I'm thinking it could have grown to be close to or even just over £30k now. It sounds like this will make a big difference if its over or under? What happens if it's just over £30,000?

She doesn't have any other pensions. She's not worried about losing the other pension benefits, like spouces pension, because my Dad already gets more than enough from his own pensions to cover himself if her death preceeded hers.

She is 65 in March so will be 66 next year and start getting State pension as I understand it.

If the pension increases by at least CPI in deferment then, yes, she's busted and will only have the options of an annual pension or a tax free lump sum and a smaller annual pension.

Is this a public sector pension?  If so, while only the LGPS offers the option of a transfer out, she is past the age limit for that.  If not public sector, then the chances of getting a sign off from an IFA/pensions specialist is remote.

Further to marcon's comment about transfer values dropping recently, that may only apply if the pension is a private sector scheme, as public sector cetvs/commutation factors are set by GAD.