Prudential - cash lump sum or continue with monthly payments

mootran

Hi there.
My 82 year old mum has been offered a cash lump sum from her private Prudential pension.  Or continue to receive a monthly payout.
The lump sum offered is £4500.  Her monthly received amount is around £30 after tax (should be £60, but pension pay rise means government taking tax from private pension.)
She's not getting much help from the Pru when she calls.  Could someone tell me what questions she should be asking.  She's been drawing the pension for 20+ years, and I can't figure out if the cash lump sum would be exempt from tax or not as per the 25% tax free cash lump sum when you start taking out a pension......

Marcon

mootran said:

Hi there.
My 82 year old mum has been offered a cash lump sum from her private Prudential pension.  Or continue to receive a monthly payout.
The lump sum offered is £4500.  Her monthly received amount is around £30 after tax (should be £60, but pension pay rise means government taking tax from private pension.)
She's not getting much help from the Pru when she calls.  Could someone tell me what questions she should be asking.  She's been drawing the pension for 20+ years, and I can't figure out if the cash lump sum would be exempt from tax or not as per the 25% tax free cash lump sum when you start taking out a pension......

You say the Pru isn't giving much help, but I'm not sure what you are expecting them to do? They aren't able to give financial advice to her, so if she's hoping they will 'tell her what's best', they quite simply aren't allowed to do so - and indeed how would they know? The only question they could answer is whether the whole amount will be taxable, and the answer would be 'potentially taxable' (ie if she's already used up her personal allowance, then it will be subject to tax).

The sum offered is around six years of payments at today's rate. If your mum has a use for ready cash now, and taking the lump sum won't run the risk of having a negative impact on any benefits she might be eligible for, that might be attractive. Alternatively, she may prefer having a steady top up in years to come, especially if the pension increases each year.

Tommyjw

All of it will be taxable (whether any is paid depends on other income), there will be no % of it immediately tax free

PaulW922

A similar thing happened to my Dad though not with the Pru - and yes he took the lump sum and it was paid net of tax (as Tommyjw says above). Only you and your Mum can really decide but I think I would be very tempted to take the lump sum.

(BTW - you may have been rounding up by a £60 gross monthly emotion payment should not usually attract 50% of income tax! )

Brie

If she's got into the tax paying territory I suspect she's not eligible for pension credit.  Does she get any other income related benefits??    This can be the biggest issue as not many people making offers of payments know enough about the individual to say much more than "I think it would be a good idea...."   I know of someone, who due to taking a lump sum payment that was backdated, was told her benefit entitlement would be backdated as well resulting in having to pay back a year's worth of benefits - which wiped out the lump sum of course.

It's possible that she had a tax free lump sum when she first started to receive this pension - assuming it was based on her own work.  If it is something she inherited - a widow's pension perhaps? - then I doubt there will be any tax free lump possible.  She may know the answers otherwise the Pru should be pushed to get her the correct information.  

Obviously the Pru considers this to be a trivial pension and is costing them too much to administer.  I wonder if they would be open to negotiation.  Pay her the £4600 and the Pru pay any tax required perhaps?  May not be possible but certainly worth asking.  

Marcon

Brie said:

It's possible that she had a tax free lump sum when she first started to receive this pension - assuming it was based on her own work.  If it is something she inherited - a widow's pension perhaps? - then I doubt there will be any tax free lump possible.  She may know the answers otherwise the Pru should be pushed to get her the correct information.  

If the pension is already in payment it's irrelevant whether any tax free cash was taken at the outset. All of it is (potentially) taxable now, as I indicated in my first post. There's nothing to 'push' the Pru about; it's that simple.

xylophone

Is the situation that your mother is in receipt of a state pension and the Pru pension?

Her  annual taxable income (SP + P + other) is in excess of £12,570?

The tax owed is deducted from the Pru pension. 

The  Pru pension is vey modest so that she is being offered a "small lump sum" which will extinguish her rights in the scheme.

It is a pension already in payment so the full amount  will be taxable  as income in the year of receipt.

Pru will pay it net of tax

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063500

sandsy

This is called a 'small lump sum' payment. Accepting the lump sum extinguishes the right to receive any more annuity payments. 

Insurance companies sometimes offer these to save the administration of paying out small annuity payments and checking whether annuitants remain alive. They can only be offered if the sum lump sum is £10,000 or less.

As the small lump sum payment represents the value of future annuity income, it is treated as taxable income in the year it is received. The payment is added to other income received in the tax year and from what you say, would likely be chargeable to basic rate tax.

Things to think about:
- your mum's preference and need for a regular income vs a lump sum
- your mums health, e.g. if she lives a long time, she might be better off carrying on receiving a regular income ( or vice versa if she is in poor health)
- current and future tax position 
- entitlement to any means tested benefits

Secret2ndAccount

All of the money is taxable, whether taken as £60/mth or £4500 once.
To get a clearer view you need to be more accurate and less emotional about the tax. Is your mum a basic rate taxpayer?  If she gets over £1,000 in other pensions (and up to about £4,000) per month, then she is a basic rate taxpayer. From £60, the tax due is 20%. That's £12. If she pays more, it will be rebated, or accounted for in other payments. If all she receives is a basic State Pension - say £11,000 - then she should not be paying tax on this £60 at all, and will eventually receive all the tax back. If that is the case, it would be perhaps unwise to trade an untaxed monthly sum for a one-off £4,500 which would push her into taxpayer territory for one year, and be subject to tax.  Some older people receive more than the basic State Pension. It would be possible for her to be receiving only the Sate Pension, but still getting enough to be in tax-paying territory. You need to understand her annual position vs the £12,570 threshold including/excluding this £60/mth.

If it's £60 taxable monthly vs £4,500 taxable once, then the lump sum is gone in 6 years or so. What is your Mum's state of health? Giving up a lot of money if she's going to be still here at 100.
If it's £60 no tax monthly vs maybe £3,500 after tax, then the lump sum is gone in about 5 years, leaning more towards keeping the monthly pension.

molerat

PaulW922 said:

A similar thing happened to my Dad though not with the Pru - and yes he took the lump sum and it was paid net of tax (as Tommyjw says above). Only you and your Mum can really decide but I think I would be very tempted to take the lump sum.

(BTW - you may have been rounding up by a £60 gross monthly emotion payment should not usually attract 50% of income tax! )

Why not ?  A K100 code from receiving a state pension of £261 pw, £1000 above the tax allowance, would deduct just under 50% of that monthly £60 payment.  Something we are going to hear of more and more of in the coming years.

DRS1

mootran said:

Hi there.
My 82 year old mum has been offered a cash lump sum from her private Prudential pension.  Or continue to receive a monthly payout.
The lump sum offered is £4500.  Her monthly received amount is around £30 after tax (should be £60, but pension pay rise means government taking tax from private pension.)
She's not getting much help from the Pru when she calls.  Could someone tell me what questions she should be asking.  She's been drawing the pension for 20+ years, and I can't figure out if the cash lump sum would be exempt from tax or not as per the 25% tax free cash lump sum when you start taking out a pension......

That sounds like she has a K tax code.  Is it possible she has more income than just the two pensions?  If so it may be that up to 50% of the lump sum will get swallowed up in tax.