59L tax code

littleD

@molerat - can you explain this please Next year you will likely have a single digit code if not 0.
I am due to retire completely shortly and have the options of full works  pension, 25% or any figure in between, any option to reduce the tax would be worth looking at for me

Dazed_and_C0nfused

littleD said:

@molerat - can you explain this please Next year you will likely have a single digit code if not 0.
I am due to retire completely shortly and have the options of full works  pension, 25% or any figure in between, any option to reduce the tax would be worth looking at for me

It's because it's highly likely that the Personal Allowance will remain £12,570 but the triple lock rules mean your State Pension will likely be around £240/week and will use virtually all your Personal Allowance.

Maximum TFLS and minimum pension is likely to result in the lowest tax but that might not be the best long term option.  Paying less tax isn't necessarily the right approach if you are actually worse off overall in the long term.

littleD

Thank you for the explanation and sorry for the late response - things got busy.
All this has raised another thought - I will need to think about taking my lump sum and pension shortly - after a lot of toing and froing with HR and have read a few post on here on this subject - one thing I can't work out (because I don't know enough about it) is if , for example I take an enhanced amount of £40,000 but need to give up £4,000 on my pension to receive this won't I effectively have paid back the enhanced figure in 10 years anyway - so that's it was  more like a loan? I realise the lump sum is tax free and there are tax issues to taking the higher pension, but would I not be better off in the long run with a higher monthly income, especially as this might go up each year? Thanks, any input appreciated

Notepad_Phil

littleD said:

Thank you for the explanation and sorry for the late response - things got busy.
All this has raised another thought - I will need to think about taking my lump sum and pension shortly - after a lot of toing and froing with HR and have read a few post on here on this subject - one thing I can't work out (because I don't know enough about it) is if , for example I take an enhanced amount of £40,000 but need to give up £4,000 on my pension to receive this won't I effectively have paid back the enhanced figure in 10 years anyway - so that's it was  more like a loan? I realise the lump sum is tax free and there are tax issues to taking the higher pension, but would I not be better off in the long run with a higher monthly income, especially as this might go up each year? Thanks, any input appreciated

Yes that's exactly right. It can definitely make sense for some to take a higher lump sum at the cost of a lower pension income, but with that particularly poor commutation rate of 10 ( i.e. £40,000 divided by £4,000 = 10), then there are very few circumstances in which I would consider it. Some (most?) people just see a lot of zeroes and automatically take it without further consideration of how it will effect them in the longer term, but it really needs some careful thought before giving up income for a lump sum.

poseidon1

Notepad_Phil said:

littleD said:

Thank you for the explanation and sorry for the late response - things got busy.
All this has raised another thought - I will need to think about taking my lump sum and pension shortly - after a lot of toing and froing with HR and have read a few post on here on this subject - one thing I can't work out (because I don't know enough about it) is if , for example I take an enhanced amount of £40,000 but need to give up £4,000 on my pension to receive this won't I effectively have paid back the enhanced figure in 10 years anyway - so that's it was  more like a loan? I realise the lump sum is tax free and there are tax issues to taking the higher pension, but would I not be better off in the long run with a higher monthly income, especially as this might go up each year? Thanks, any input appreciated

Yes that's exactly right. It can definitely make sense for some to take a higher lump sum at the cost of a lower pension income, but with that particularly poor commutation rate of 10 ( i.e. £40,000 divided by £4,000 = 10), then there are very few circumstances in which I would consider it. Some (most?) people just see a lot of zeroes and automatically take it without further consideration of how it will effect them in the longer term, but it really needs some careful thought before giving up income for a lump sum.

Another way I sold the the idea of foregoing lump sum cash in favour of higher annual pension, was what rate of interest could be  earned on the lump sum compared to the higher pension? 

In the case I advised back in 2015  it should have been a  very easy choice based on 1% bank savings rates (available at the time) compared to a very generous additional £17,000  annual pension in exchange for sacrificing £100k lump sum. Should have been a no brainer, but there was a little hesitation because this meant paying 40% tax on some of the increase,  fortunately they went for it in the end.

In the present case £40k would have to generate 10% interest , to match the £4,000 pension, so foregoing the cash still looks appealing to me even in this somewhat higher interest rate environment.