Tax rate on DB pension lump sum.

BillyBatter1

Hi ,I have made the decision to retire from work and to spend some relaxation time doing things for me.I have worked in the Utilities sector for 40 plus years and I have been fortunate to have contributed to a decent Final Salary Pension scheme [DB scheme] for 40 of those years.I am currently a 40% tax payer and my retirement date is the end of April so I am now getting my pension figures through from the provider.So lots of figures and permitations to sort out especially as there is the offer of taking an enhanced lump sum for a reduction in the annual pension.I am aware of the 25% tax free lump sum which can be taken from the lump sum/enhanced lump sum but i am unsure as to the tax rate that the other 75% would be taxed at.The value of the normal quoted annual pension is £36784 with a lump sum quoted at £112K. As the entire lump sump has to be taken when I start to take the pension at the end of April I am really unsure as to what tax rate I would pay on the lump sum.My thoughts are that I would be a 20% tax payer as I will be into a new tax year and just the DB pension as income. Thanks in advance for any information.

Ayr_Rage

Your lump sum (PCLS) is totally tax free, even if enhanced when you elect to take a lower pension.

The pension itself is subject to income tax.

Simple as that.

Flugelhorn

I took more lump sum in my NHS pension, I seem to remember you could take 25% tax free up to a notional "pot value" (calculated somehow - in this case 20x the pension + the lump sum) - which meant that you could take quite a lot more tax free than the 3x amount - however, whether it is wise to do so is another matter 

xylophone

 Assuming that you are under SPA, have you obtained a state pension forecast? 

https://www.gov.uk/check-state-pension

With regard to the pension commencement lump sum, this would be tax free but the monthly pension is taxed just as a salary is taxed.

That is to say, you have a  tax free personal allowance (full personal allowance is currently £12570) with the balance taxed at the appropriate rate.

https://www.gov.uk/income-tax-rates

Do you have savings/dividend income outside tax privileged accounts like ISA?

https://www.litrg.org.uk/pensions/pension-withdrawals/tax-pension-income#:~:text=Regular pension income,before paying it to you.

https://www.litrg.org.uk/savings-property/tax-savings-and-investments

Flugelhorn

BillyBatter1 said:

.I am aware of the 25% tax free lump sum which can be taken from the lump sum/enhanced lump sum but i am unsure as to the tax rate that the other 75% would be taxed at

Which 75% is this? 

BillyBatter1

Flugelhorn said:

BillyBatter1 said:

.I am aware of the 25% tax free lump sum which can be taken from the lump sum/enhanced lump sum but i am unsure as to the tax rate that the other 75% would be taxed at

Which 75% is this? 

I am making the assumption that of the £112K  lump sum 25% would be tax free [ 28K ] and the other 75% [84K] I would be liable to pay tax on.Perhaps I am missing the point somewhere.

NoMore

BillyBatter1 said:

Flugelhorn said:

BillyBatter1 said:

.I am aware of the 25% tax free lump sum which can be taken from the lump sum/enhanced lump sum but i am unsure as to the tax rate that the other 75% would be taxed at

Which 75% is this? 

I am making the assumption that of the £112K  lump sum 25% would be tax free [ 28K ] and the other 75% [84K] I would be liable to pay tax on.Perhaps I am missing the point somewhere.

Yes you are missing the point, @Ayr_Rage has already covered it but the PCLS from a DB pension is 100% tax free.

BillyBatter1

Ayr_Rage said:

Your lump sum (PCLS) is totally tax free, even if enhanced when you elect to take a lower pension.

The pension itself is subject to income tax.

Simple as that.

Thanks for your reply.Very quick ,concise and straightforward.I like it .

BillyBatter1

NoMore said:

BillyBatter1 said:

Flugelhorn said:

BillyBatter1 said:

.I am aware of the 25% tax free lump sum which can be taken from the lump sum/enhanced lump sum but i am unsure as to the tax rate that the other 75% would be taxed at

Which 75% is this? 

I am making the assumption that of the £112K  lump sum 25% would be tax free [ 28K ] and the other 75% [84K] I would be liable to pay tax on.Perhaps I am missing the point somewhere.

Yes you are missing the point, @Ayr_Rage has already covered it but the PCLS from a DB pension is 100% tax free.

Yep I think I have missed the point greatly somewhere.Now fully educated .Thanks for your help.

Flugelhorn

BillyBatter1 said:

Flugelhorn said:

BillyBatter1 said:

.I am aware of the 25% tax free lump sum which can be taken from the lump sum/enhanced lump sum but i am unsure as to the tax rate that the other 75% would be taxed at

Which 75% is this? 

I am making the assumption that of the £112K  lump sum 25% would be tax free [ 28K ] and the other 75% [84K] I would be liable to pay tax on.Perhaps I am missing the point somewhere.

as others have mentioned the whole lump sum is tax free - so definitely good news for you 

the 25% bit makes more sense in DC pensions where there is a "pot" - doesn't happen like that in DB pensions

dunstonh

.I am aware of the 25% tax free lump sum which can be taken from the lump sum/enhanced lump sum but i am unsure as to the tax rate that the other 75% would be taxed at.

There is no 25% tax free lump sum with a DB scheme.    DB schemes have a different calculation method that is broadly meant to equate to similar but it allows a bit more of a choice.   Its not known as 25% tax free lump sum.  It is known as pension commencement lump sum.

PCLS is tax free up to the lump sum allowance, which you are not near.