Tax rate on DB pension lump sum.

BillyBatter1

Flugelhorn 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.

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

O.k. Thanks.Perhaps in my thought process I was mixing up the two types of pension schemes.I am getting a lot of information and figures sent out to me from the pension administrators I can now take stock,breathe and make any decisions thoughtfully.

BillyBatter1

dunstonh 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.

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.

Thats good thanks.The term "25% tax free lump sum" seems to be banded around a lot in chat and forums these days that it must have got stuck in my brain thoughts.The equation for me in a DB scheme is really a lot simpler than I had first thought.With no additional earnings or state pension for several years the only tax will be on the £36,784 annual pension which under current the HMRC rate will be at 20%.

Marcon

BillyBatter1 said:

dunstonh 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.

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.

Thats good thanks.The term "25% tax free lump sum" seems to be banded around a lot in chat and forums these days that it must have got stuck in my brain thoughts.The equation for me in a DB scheme is really a lot simpler than I had first thought.With no additional earnings or state pension for several years the only tax will be on the £36,784 annual pension which under current the HMRC rate will be at 20%.

Just to really confuse things, there can be a 25% lump sum with DB pensions - several of the major public sector schemes offer that option and describe it accordingly (it's 25% of the capital value of the DB pension).

Sarahspangles

BillyBatter1 said:

With no additional earnings or state pension for several years the only tax will be on the £36,784 annual pension which under current the HMRC rate will be at 20%.

The next challenge is that if you don’t have plans for your PCLS (lump sum) and decide to put it into savings, you may pay tax on the interest over £1,000.

Mentioning it now in case you haven’t used your ISA allowance this year, and could do so in advance of receiving your PCLS. You get another £20k to play with next year.

Of course it’s not a problem to be paying tax, but interest rates on ISAs have recently been competitive and you may as well take advantage of them. The other way to ‘save’ and pay no tax is Premium Bonds, but I can’t recommend those as I’m so unlucky with them!

Albermarle

BillyBatter1 said:

dunstonh 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.

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.

Thats good thanks.The term "25% tax free lump sum" seems to be banded around a lot in chat and forums these days that it must have got stuck in my brain thoughts.The equation for me in a DB scheme is really a lot simpler than I had first thought.With no additional earnings or state pension for several years the only tax will be on the £36,784 annual pension which under current the HMRC rate will be at 20%.

You also need to think about whether to take less lump sum and get more annual pension, if that is an option.
From a tax point of view it seems obvious to take the lump sum, but it all depends how much pension you are giving up and how good the conditions of the pension are ( inflation linked? pensions for spouse if you die etc).
If you divide the lump sum by the amount the pension is reduced, you get a figure known as the commutation rate.
Anything less than 15 is seen as poor, whilst anything approaching 25 is seen as very good. Public sector schemes tend to have poor rates, sometimes as low as 12.

finbaar

Albermarle said:

BillyBatter1 said:

dunstonh 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.

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.

Thats good thanks.The term "25% tax free lump sum" seems to be banded around a lot in chat and forums these days that it must have got stuck in my brain thoughts.The equation for me in a DB scheme is really a lot simpler than I had first thought.With no additional earnings or state pension for several years the only tax will be on the £36,784 annual pension which under current the HMRC rate will be at 20%.

You also need to think about whether to take less lump sum and get more annual pension, if that is an option.
From a tax point of view it seems obvious to take the lump sum, but it all depends how much pension you are giving up and how good the conditions of the pension are ( inflation linked? pensions for spouse if you die etc).
If you divide the lump sum by the amount the pension is reduced, you get a figure known as the commutation rate.
Anything less than 15 is seen as poor, whilst anything approaching 25 is seen as very good. Public sector schemes tend to have poor rates, sometimes as low as 12.

I've been going through the bigger lump, smaller pension vs smaller lump, bigger pension calculations myself today. I'm in a civil service type pension myself and the commutation rate is 12 (well I think it's 12, certainly no greater than 14). I'm probably going to go bigger monthly pension as all I would do with a bigger lump sum is top up my monthly spend anyway and that seems daft. If I had a need for the additional lump sum it would be different - pay off a mortgage for instance, but luckily that was done years ago.

Flugelhorn

I took a higher lump sum from public sector pension to avoid lifetime allowance taxation - worked fine... for 18 months and then they recalculated and found they owed me some more so bit extra tax to pay