Lump sum or increased annual àmount

vixen1500

Hiya all,  if I take a lump sum out of my pension it's tax free.  
Therefore £1,000 lump sum .non taxable equals £1,020

If I choose higher annual payments paid monthly and no lump sum, is all of the annual payment Taxable?


Hope this question makes sense 

Marcon

vixen1500 said:

Hiya all,  if I take a lump sum out of my pension it's tax free.  
Therefore £1,000 lump sum .non taxable equals £1,020

No - you'd pay £200 (assuming you are a basic rate taxpayer) if a lump sum of £1,000 is taxable, so a tax free lump sum of £1,000 is 'worth' more than £1,020 in tax terms.

vixen1500 said:

If I choose higher annual payments paid monthly and no lump sum, is all of the annual payment Taxable?

Assuming this is a defined benefit scheme (and from the wording of your question it is), all monthly payments are potentially taxable, depending on whether your taxable income for each year is more than the personal allowance. If it's below the personal allowance, then you'd pay no tax. 

af1963

Lump sum £1000 is equivalent to £1250 of taxable income if you're a standard rate taxpayer outside Scotland. (If you got £1250 taxable income, you'd pay 20% tax on it, reducing it to £1000)

Depends on what type of pension. If (as it sounds like) it's a final salary scheme, yes, all the regular amounts would be taxable.  Usually for this type of pension, you get a one-time choice when you start taking the pension about whether to take a lump sum, and how much.

If it is using drawdown to take money from a defined contribution scheme, then 25% of each withdrawal is tax free if you haven't already taken the tax free cash on that part of the fund as a lump sum earlier. 

MallyGirl

the pension income is taxable but what tax you pay will depend on any other income. If the pension pays out below the nil rate band of £12k ish then you won't pay any tax, if between £12k and £45k/50k ish then you will pay 20% of the amount over £12k ish. Just like a job. 

vixen1500

Thanks everyone, 
So it definitely sounds like taking the lump sum is the sensible option.
Especially as I was incorrectly working out the amount tax of due per £1,000.

I was uncertain as I have no current use/need for a lump sum if it would of been more financially beneficial to have left it in the pension pot. 

I am already a basic rate tax payer, would probably push me into higher rate bbracket taking the higher annual payment.

Thanks again for your help 

Pat38493

The fact that the lump sum is not taxable, but the higher pension payments would be considered as taxable income for income tax purposes, does not necessarily mean it's a "no brainer" and you should always take the lump sum.  This also depends on what is termed the "commutation rate" i.e. how much lump sum do you get for each pound of income you lost.  

Different schemes have wildly different commutation rates and you would need to take that into account, and also an understanding of how the monthly pension payments will increase once it's in payment.

(this assumes you are talking about a defined benefit pension as other posters indicated).

Dazed_and_C0nfused

vixen1500 said:

Thanks everyone, 
So it definitely sounds like taking the lump sum is the sensible option.
Especially as I was incorrectly working out the amount tax of due per £1,000.

I was uncertain as I have no current use/need for a lump sum if it would of been more financially beneficial to have left it in the pension pot. 

I am already a basic rate tax payer, would probably push me into higher rate bbracket taking the higher annual payment.

Thanks again for your help 

I think you might get a clearer idea of your options if you clarified if this was a DB (final salary/CARE) or DC pension.

Taking more than the standard PCLS from a DB pension isn't always a good choice financially, a lot on depends on the rate of exchange, which can be as low as £12 one off PCLS for each inflation protected £1 of pension income forever given up.

vixen1500

Hiya, 
According to the letter it is a 'Pension and Death Benefit Plan'.

I have been paying into and withdrawing from the Hargreaves Landsdown SIPP for the last couple of years to take advantage of the £720 tax relief.  Will that affect the amount I can withdraw tax free from this one?  

Marcon

vixen1500 said:

Hiya, 
According to the letter it is a 'Pension and Death Benefit Plan'.

That still doesn't confirm what type of scheme it is. Do the words 'final salary' or 'CARE' or 'defined benefit' appear anywhere (one of more of those terms is highly likely to be in the literature - I'd be surprised if it is a defined contribution scheme, from what you've already said).

vixen1500 said:

I have been paying into and withdrawing from the Hargreaves Landsdown SIPP for the last couple of years to take advantage of the £720 tax relief.  Will that affect the amount I can withdraw tax free from this one?  

Each pension arrangement is considered separately. There is normally an overall limit of total tax free cash of around £268,000 on all of an individual's pension arrangements, so doesn't sound as if you'll be impacted from what you've written. 

vixen1500

Hiya,
After searching through related paperwork I have found the following information:-

'The plan is a contracted-out defined benefit, final salary pension scheme '.

Does this help??

Albermarle

vixen1500 said:

Thanks everyone, 
So it definitely sounds like taking the lump sum is the sensible option.
Especially as I was incorrectly working out the amount tax of due per £1,000.

I was uncertain as I have no current use/need for a lump sum if it would of been more financially beneficial to have left it in the pension pot. 

I am already a basic rate tax payer, would probably push me into higher rate bbracket taking the higher annual payment.

Thanks again for your help 

Depending on the terms of the scheme, the payments will most likely rise each year due to inflation.