ill health retirement & potential tax bill

blues

I’m being ill health retired from the LGPS aged 49 on 48k a year. It looks like I will potentially have a sizeable tax bill due to the big uplift in pension amount. I’m not clear on how to work out this tax amount & wondered if anyone is able to roughly work out the amount. 

The pension I had built up to this year was 22.5k but it is being enhanced to 48k. I do have some spare annual allowance from the last couple of years adding up to around 66k. Thanks in advance.

Marcon

blues said:

I’m being ill health retired from the LGPS aged 49 on 48k a year. It looks like I will potentially have a sizeable tax bill due to the big uplift in pension amount. I’m not clear on how to work out this tax amount & wondered if anyone is able to roughly work out the amount. 

The pension I had built up to this year was 22.5k but it is being enhanced to 48k. I do have some spare annual allowance from the last couple of years adding up to around 66k. Thanks in advance.

This may help: https://www.lgpsmember.org/your-pension/the-essentials/tax/

The Civil Service has a guide covering precisely the question you are asking in rather more detail than the LGPS link I've just given. I know it's a different scheme, but the similarities are there, so might be helpful: https://www.civilservicepensionscheme.org.uk/media/bg2i4iy5/impact-of-annual-allowance-on-ill-health-retirement-jul-2024.pdf

blues

Thanks for this. I’m still confused as I need to make a decision on whether to take a lump sum or just take the annual pension with no lump sum. Am I right that by taking a lump sum & less annual pension I’ll have a lower tax bill, because I won’t go as much over my Annual Allowance?

I asked my pension provider this (LGPS) & they said that “a possible tax charge relates to your annual allowance not the elections that you make regarding your pension.” This has confused me.

AlanP_2

blues said:

Thanks for this. I’m still confused as I need to make a decision on whether to take a lump sum or just take the annual pension with no lump sum. Am I right that by taking a lump sum & less annual pension I’ll have a lower tax bill, because I won’t go as much over my Annual Allowance?

I asked my pension provider this (LGPS) & they said that “a possible tax charge relates to your annual allowance not the elections that you make regarding your pension.” This has confused me.

@Silvertabby can hopefully explain some of this.

What I think they are saying, and what I think from reading your initial post, is that you will exceed Annual Allowance because your overall pension "value" has increased significantly almost overnight.

Whether you then choose (elect) to take it as lump sum or annual pension won't affect that increase in value. How you want it paid out is It is Step 2 if you like.

Silvertabby

The AA tax bill may be waived if you retire under serious ill health, either with limited life expectancy, or unlikely to be fit for work of any description before SPA. That decision is made by the Occ Health Dr who ticks a yes/no box on the Ill Health recommendation forms.

If you don't qualify for the waiver, (and I hope for your sake that you don't!) then it doesn't matter how you opt take your lump sum/pension.  The amount due will be the same.

If you prefer, you can ask your LGPS to make the payment for you, but this would result in a permanent reduction to your pension.  You would have to request this before your pension is brought into payment.

blues

Ok thank you, that makes sense. OH ticked the box stating I’m not exempt from the tax.

I will stick with my original plan of taking the full pension & no lump sum then, as I mistakenly thought I would pay less tax by taking a lump sum.

AlanP_2

Glad we could help, pension "rules" and "terminology" can be very confusing especially for non-standard situations such as yours.

Good luck in the future.