Pension Lump Sum Tax

squidley

My wife is going to retire at some stage early next year. Her pension is part DB and part DC.

Her DB pension is relatively straightforward. Approx £80K tax free lump sum and £1k per month. Her DC pension pot is approx £40k. Of this £10k can be taken as a tax free lump sum.

If we were to take the remaining amount (30k) as one lump sum would the whole amount be taxed at 20%? So she would pay £6k. Or would it be added to her total income and then taxed at initially 20% and then 40% over the 50k threshold?

A couple of supplementary questions if I may.

I understand the taxable lump sum payment may be subject to an emergency tax code. How does this work in practice?

I also understand the DC lump sum can be taken over two consecutive tax years. Would this be worth it? Can anyone given an indication of how much tax she would save? 

Thanks

MallyGirl

the 75% taxable amount from her DC pension would be added to her income in the tax year and tax would applied to the whole. If it was the first drawdown it would probably happen with the emergency tax code and then might need some tax adjustment after the fact.

Dazed_and_C0nfused

squidley said:

My wife is going to retire at some stage early next year. Her pension is part DB and part DC.

Her DB pension is relatively straightforward. Approx £80K tax free lump sum and £1k per month. Her DC pension pot is approx £40k. Of this £10k can be taken as a tax free lump sum.

If we were to take the remaining amount (30k) as one lump sum would the whole amount be taxed at 20%? So she would pay £6k. Or would it be added to her total income and then taxed at initially 20% and then 40% over the 50k threshold?

A couple of supplementary questions if I may.

I understand the taxable lump sum payment may be subject to an emergency tax code. How does this work in practice?

I also understand the DC lump sum can be taken over two consecutive tax years. Would this be worth it? Can anyone given an indication of how much tax she would save? 

Thanks

Not without details of all her taxable income and whether she might be liable to HICBC no.  

Steve_666_

Do you have a reason for taking the 10K, else UFPLS as required might be a better option. Why remove this money from its tax free wrapper until you need it, the UFPLS will be taxed at 15% as long as you don't exceed the 40% boundary in the year

HawkE

squidley said:

If we were to take the remaining amount (30k) as one lump sum would the whole amount be taxed at 20%? So she would pay £6k. Or would it be added to her total income and then taxed at initially 20% and then 40% over the 50k threshold?

It would it be added to her total income and then taxed at initially 20% and then 40% over the 50k threshold.

One thing you might consider is only taking a portion of the remaining £30k so that her total income remains at or under the £50k threshold for the tax year.   This may mean that it takes two or more years to take the £30k but would mean it avoids the 40% taxation.

Albermarle

Her DB pension is relatively straightforward. Approx £80K tax free lump sum and £1k per month

There should also be an alternative to not take a lump sum and have a higher pension ? For some people that is a better option, or at least consider it.

squidley

Thank you all for your very helpful comments. In my naivety I had assumed the £30k would be taxed at 20%, irrespective of her other income. We can examine the option of taking the payment in two parts, which would keep her below the 40% threshold. 

And re your comments about her taking a lower lump sum and higher monthly payments. I had the good fortune to retire at 55 with a decent (public sector) pension. I opted for a higher monthly income and lower lump sum. This keeps us ticking along ok. I get my state pension in a few years time.  However for my wife's pension we want to maximise her lump sum. Partly because we are moving house and partly because we want to make the most of the next few years before the country completely disappears down the plug hole. 

Can anybody explain how the emergency tax code works. Assuming she took the whole £30k in one fell swoop how would it be taxed? Grateful for any advice. 

Marcon

squidley said:

Thank you all for your very helpful comments. In my naivety I had assumed the £30k would be taxed at 20%, irrespective of her other income. We can examine the option of taking the payment in two parts, which would keep her below the 40% threshold. 

And re your comments about her taking a lower lump sum and higher monthly payments. I had the good fortune to retire at 55 with a decent (public sector) pension. I opted for a higher monthly income and lower lump sum. This keeps us ticking along ok. I get my state pension in a few years time.  However for my wife's pension we want to maximise her lump sum. Partly because we are moving house and partly because we want to make the most of the next few years before the country completely disappears down the plug hole. 

Can anybody explain how the emergency tax code works. Assuming she took the whole £30k in one fell swoop how would it be taxed? Grateful for any advice. 

Once again https://www.litrg.org.uk/tax-guides/pensioners/what-tax-position-when-i-take-money-my-pension-flexibly proves extremely useful and clear, and has examples which add to its usefulness.


Scroll down to the section headed 

How much tax will I have to pay on taking money out of my pension?

Dazed_and_C0nfused

squidley said:

Thank you all for your very helpful comments. In my naivety I had assumed the £30k would be taxed at 20%, irrespective of her other income. We can examine the option of taking the payment in two parts, which would keep her below the 40% threshold. 

And re your comments about her taking a lower lump sum and higher monthly payments. I had the good fortune to retire at 55 with a decent (public sector) pension. I opted for a higher monthly income and lower lump sum. This keeps us ticking along ok. I get my state pension in a few years time.  However for my wife's pension we want to maximise her lump sum. Partly because we are moving house and partly because we want to make the most of the next few years before the country completely disappears down the plug hole. 

Can anybody explain how the emergency tax code works. Assuming she took the whole £30k in one fell swoop how would it be taxed? Grateful for any advice. 

The emergency code is 1257L and on a first payment this is operated on a non cumulative basis.

So no tax on first £1,048 and then as she is taking the equivalent of £360k it will be a mix of 20, 40 and 45% tax.

squidley

Macron - thank you.  That looks very helpful. I will have a read.

Dazed and Confused - thank you. That is very helpful. I presume at some stage we can claim all the overpaid tax back. How quickly can this happen? And is it a relatively easy process? 

Dazed_and_C0nfused

squidley said:

Macron - thank you.  That looks very helpful. I will have a read.

Dazed and Confused - thank you. That is very helpful. I presume at some stage we can claim all the overpaid tax back. How quickly can this happen? And is it a relatively easy process? 

You don't need to claim it back, HMRC will automatically refund any overpaid tax in the summer/autumn after the end of the tax year.

This could potentially happen before any claim you submit is dealt with!

https://www.gov.uk/tax-overpayments-and-underpayments

NB.  The above assumes your wife doesn't need to complete a tax return.