Early Pension Lump Sum Payment - Tax Free?

dinamight

Hello

My apologies if this question has been answered before but I'm afraid I can't find the exact topic.

I will turn 50 in July 2008 and will be able to start taking a reduced pension from the company I left in 2000. I now do contract work (not for the same company) part of the year only.

My options are:

1. A lump sum of £43000 and annual payment of £5878
2. An annual payment of £7838 (and no lump sum)

The convertible rate is around 22:1 for the lump sum payout and as the reduced payment is 75% of the £7838 I believe this means the lump sum is 25% of my pension "pot".

My question:

Is the £43000 tax free? If so would it still be tax free if I did earn some income this year?

Thank you!

Naughty_Sausage

I think that whether or not your lump sum will be tax free depends on the percentage of your Life Time Allowance that your benefits will use up and the percentage of this allowance used up by other pensions which you have. Details of your Life Time Allowance should have been provided to you along with your quotation.

As long as the value of your benefits do not exceed £1.65 million for the 2008/9 tax year and as long as your Life Time declaration Forms have been completed the lump sum should be tax free.

Note that value of your benefits is not just the monetary amount of your benefits. It should be pensionx20 or pensionx20+lump sum.

Please correct me if this is wrong.

dinamight

Thank you NS!

I did ask my company about the tax implications about taking the lump sum and they told me to ask my Financial Advisor (I do not have one).

It sounds like I should be well within the limit you state however as I have no other company pensions.

Kind regards

EdInvestor

dinamight wrote: »

The convertible rate is around 22:1 for the lump sum payout

This is quite a good rate, so good to take the tax free cash.

Is the £43000 tax free? If so would it still be tax free if I did earn some income this year?

Yes.

dinamight

Thank you Ed!

Sounds like sound advice - to take the money before it can be taxed.