Taxation of Pension Lump Sum

[wmgw15]

Following me doing some calculations I have identified that my pension lump sum payment will exceed the maximum of 25% of the total value of my benefits and will therefore be liable to tax.

Does anybody know what percentage of tax I will have to pay on the amount that exceeds the 25% threshold and where I can find the information please? I intend to commute the full 25% of my pension as a lump sum.

Many thanks in anticipation.

[bill.advanced]

Following me doing some calculations I have identified that my pension lump sum payment will exceed the maximum of 25% of the total value of my benefits and will therefore be liable to tax.

Does anybody know what percentage of tax I will have to pay on the amount that exceeds the 25% threshold and where I can find the information please? I intend to commute the full 25% of my pension as a lump sum.

Many thanks in anticipation.

Any amount over the threshold is treated as income, and taxed at the relevant rate. This means it will also be subject to nhs. If you are in good health on retirement it may be worth considering only taking your lump sum up to the maximum, and then take a larger pension. Remember you only pay income tax on your pension, no NHI.
Take a look at this

https://pensions.gov.scot/firefighters/y...calculator

[wmgw15]

Any amount over the threshold is treated as income, and taxed at the relevant rate. This means it will also be subject to nhs. If you are in good health on retirement it may be worth considering only taking your lump sum up to the maximum, and then take a larger pension. Remember you only pay income tax on your pension, no NHI.
Take a look at this

https://pensions.gov.scot/firefighters/y...calculator

Thanks for your response Bill. I think I will need take to take further advice on this as I find the tax element very confusing!

I have been caught up in the Pensions debacle with no protection but hoping to retire in September 2022 at age 50 with 30 years service and trying to base my calculations on being protected up until March the 31st 2022 on the 1992 scheme following the success of our legal challenge. I will be happy to take the hit on the Part 2 Pension as I am eager to retire.

I am serving in a Welsh Brigade which have different protection arrangements to the Scottish Fire Service - all very confusing!!

[bill.advanced]

Thanks for your response Bill. I think I will need take to take further advice on this as I find the tax element very confusing!

I have been caught up in the Pensions debacle with no protection but hoping to retire in September 2022 at age 50 with 30 years service and trying to base my calculations on being protected up until March the 31st 2022 on the 1992 scheme following the success of our legal challenge. I will be happy to take the hit on the Part 2 Pension as I am eager to retire.

I am serving in a Welsh Brigade which have different protection arrangements to the Scottish Fire Service - all very confusing!!

Section 3.5 covers what you are looking for

https://gov.wales/sites/default/files/pu...nnex-1.pdf

[wmgw15]

Section 3.5 covers what you are looking for

https://gov.wales/sites/default/files/pu...nnex-1.pdf

Section 3.5 covers what you are looking for

https://gov.wales/sites/default/files/pu...nnex-1.pdf

Thanks Bill. I have been informed by several people that although you take a bigger hit on tax, it is more beneficial to commute the maximum 25% of the pension as a lump as it would take a considerable amount of time to equal the lump you would have had you not commuted less. The calculation takes into account the small amount of extra pension you will be drawing annually by commuting less of lump. I suppose everybody's circumstances are different!

I have just done a calculation and estimated that it would take me 20 years to make up the difference in the lump by commuting less (if I've got my sums right).

It is quite a long and drawn out calculation and I'm not sure if there is any calculator out there that works this out for you.

This is of course dependant on the accuracy of information being passed on by others and the amount of tax payable on the lump.

[Stressed]

You will pay tax at 20%. Unless you are a senior officer on over £50K per year paying 40% tax
Realistically if you take the larger lump sum paying a bit of tax it's probably worth having the extra few £k now.
If you take the smaller lump sum now your monthly pension will go up £20 to £30 per month max and you with pay 20% income tax on that £20 to £30.
If you work out how many years you have to earn that £20 to £30/month after tax to gain the additional lump sum after tax that you could have had it will probably be 10 years plus before you are actually in profit (the extra per month adds up to more than you after tax additional lump sum)

For most FF up to Wm the additional limp sum is more beneficial/usable at the point of retirement than the few £ per month pension.
For example I invested part of my lump sun. Even with Covid the gain over the past 3 years has been equivalent per month to what I would have got extra per month. I HAVE NOT LOST OUT by paying a bit of tax on part of my lump sum!

You could also look at that extra lump sum paying towards a new car v the interest you could pay on finance.

I have worded this out for a number of FF over the years when helping with their pension decisions

[bill.advanced]

Thanks Bill. I have been informed by several people that although you take a bigger hit on tax, it is more beneficial to commute the maximum 25% of the pension as a lump as it would take a considerable amount of time to equal the lump you would have had you not commuted less. The calculation takes into account the small amount of extra pension you will be drawing annually by commuting less of lump. I suppose everybody's circumstances are different!

I have just done a calculation and estimated that it would take me 20 years to make up the difference in the lump by commuting less (if I've got my sums right).

It is quite a long and drawn out calculation and I'm not sure if there is any calculator out there that works this out for you.

This is of course dependant on the accuracy of information being passed on by others and the amount of tax payable on the lump.

Get proper advice from your pension adviser.
There is no simple unilateral answer here.
It very much depends on your personal circumstances and requirements on retirement. Your calculations can never be accurate due to unknown inflation rises over the years. Also ensure that this additional income does not take you over the 20% threshold taking into consideration any other income you may have outside the fire service. Also you will pay a minimum of 29% combined tax and nhs, whereas you only pay tax in retirement. A lot to think about, but don’t simply look to the short term. Remember at 50 you could be retired longer than you worked in the fire service. Happy retirement when it comes.

[wmgw15]

You will pay tax at 20%. Unless you are a senior officer on over £50K per year paying 40% tax
Realistically if you take the larger lump sum paying a bit of tax it's probably worth having the extra few £k now.
If you take the smaller lump sum now your monthly pension will go up £20 to £30 per month max and you with pay 20% income tax on that £20 to £30.
If you work out how many years you have to earn that £20 to £30/month after tax to gain the additional lump sum after tax that you could have had it will probably be 10 years plus before you are actually in profit (the extra per month adds up to more than you after tax additional lump sum)

For most FF up to Wm the additional limp sum is more beneficial/usable at the point of retirement than the few £ per month pension.
For example I invested part of my lump sun. Even with Covid the gain over the past 3 years has been equivalent per month to what I would have got extra per month. I HAVE NOT LOST OUT by paying a bit of tax on part of my lump sum!

You could also look at that extra lump sum paying towards a new car v the interest you could pay on finance.

I have worded this out for a number of FF over the years when helping with their pension decisions

Thanks for your post Stressed, what you have just said echos what others have told me.

I’ll be finishing as a flexi duty SM so just touching the £50k on my current salary.

Would this have an impact on how much tax I pay on my lump do you know?

[wmgw15]

Get proper advice from your pension adviser.
There is no simple unilateral answer here.
It very much depends on your personal circumstances and requirements on retirement. Your calculations can never be accurate due to unknown inflation rises over the years. Also ensure that this additional income does not take you over the 20% threshold taking into consideration any other income you may have outside the fire service. Also you will pay a minimum of 29% combined tax and nhs, whereas you only pay tax in retirement. A lot to think about, but don’t simply look to the short term. Remember at 50 you could be retired longer than you worked in the fire service. Happy retirement when it comes.

Thanks for the advice bill! Can’t wait to finish and hopefully have at least 30 years out of the pension!

Wishing you the very best of health also

[bill.advanced]

Thanks for your post Stressed, what you have just said echos what others have told me.

I’ll be finishing as a flexi duty SM so just touching the £50k on my current salary.

Would this have an impact on how much tax I pay on my lump do you know?

You will pay 49% tax and nhi from what you have just posted.

This is a game changer for me. You will only pay 20% on your pension.

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