I can take a gov pension early but....

MikMikandThriceMik

I can take an old gov pension early. Not much in it for the monthly, only £XXX or so, but the lump sum would really help me out.
Leaving it in for another two years will not add much to it since I am not paying into it.
I can leave it in any longer than the 2 more years.
Is the lump sum taxable by either pension tax or being included as part of my earned income?
Is the pension amount taxable considering I am earning a lot more than the personal allowance? 
Thank you.

molerat

If you take it as a lump sum 25% will be tax free and the rest taxable as income.  Due to the way it is taxed by the payer, in accordance with the tax regulations, you may overpay or underpay tax on that amount.

If you take it as a pension the starting lump sum will be tax free and the pension payments will be taxable as income.

MikMikandThriceMik

molerat said:

If you take it as a lump sum 25% will be tax free and the rest taxable as income.  Due to the way it is taxed by the payer, in accordance with the tax regulations, you may overpay or underpay tax on that amount.

If you take it as a pension the starting lump sum will be tax free and the pension payments will be taxable as income.

But it is not my complete pensions. I have > £XXXK in my other pensions which I will not take them until many years.
Can this old gov pension lump sum be considered as less than 25% of my total pensions lump sum, and so none of it will be taxable?
It is all so confusing

sammyjammy

No you can't do that , its 25% of each pension, however, you say its a government pension, who did you work for?  Its likely to be a Defined benefit pension in which the 25% tax free doesn't apply.

Silvertabby

If it's an old public sector DB pension then it may come with an automatic lump sum.  The lump sum is tax free, with the monthly pension payments being classed as taxable income.

MikMikandThriceMik

I did not know that I could not get the 25% free. 

MikMikandThriceMik

Silvertabby said:

If it's an old public sector DB pension then it may come with an automatic lump sum.  The lump sum is tax free, with the monthly pension payments being classed as taxable income.

Yes it is an old Gov DB schene. Could the lump sum be considered as earned income as taxed as PAYE?

sammyjammy

No the lump sum as defined in the pension is tax free, if you increase the lump sum you would lose £1 of pension for every £12 the lump sum is increased (poor value).

MikMikandThriceMik

sammyjammy said:

No the lump sum as defined in the pension is tax free, if you increase the lump sum you would lose £1 of pension for every £12 the lump sum is increased (poor value).

Thank you so much.
I gave only 2 years to go before I must take it, so I am thinking it might make more sense to take the largest lump sum now and put that lump sum in a challengers bank 5% ISA. Maybe I'll spend today trying to work it all out

Silvertabby

Nilgosc = Northern Ireland LGPS?

Depending on when you left, and the actual scheme rules (NI regs sometimes differ) you may be able to realise a larger tax free lump sum by commuting (giving up) some of your annual pension.  But this would be at the pretty poor rate of 1:12 (permanently lose £1 of fully index linked pension for the rest of your life for each £12 of tax free cash).

Whichever option you go for, the lump sum is totally tax free.

MikMikandThriceMik

I am taking the pension prov name and amounts out of this post, just for my own security.
Thanks for all your help.