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Lump sum and tax return

Discussion in 'Retirement' started by ilovepatnevin, May 2, 2020.

  1. ilovepatnevin

    ilovepatnevin New commenter

    Does anyone know if the pension lump sum needs to get included in your tax return?
    I'm assuming that as it is always referred to as "tax-free" it doesn't need to be included.
  2. Morninglover

    Morninglover Star commenter

    Pretty certain I didn't mention it; (did I even have a tax form to fill in? Most years I didn't!)
  3. border_walker

    border_walker Lead commenter

    Never had to fill in a tax return.
  4. diddydave

    diddydave Established commenter

    Yes, in the same way as you don't have to put in interest from ISAs which are also tax-free you do not have to put the lump sum anywhere on the return.

    At the end of the tax year you get a P60 from Teachers Pensions and it only has the monthly payments on as the taxable income.
    eljefeb90 likes this.
  5. nadiastanbridge

    nadiastanbridge New commenter

    Please can someone tell me when cashing in an AVC Pension Plan to receive the lump sum, at what point is the tax paid? (I know the first 25% is tax free ...)
  6. diddydave

    diddydave Established commenter

    The Prudential deduct tax when they pay it to you.

    However, they work it out as though it was a monthly payment...so if you were to take £10,000 it is treated as an 'annual' income of £120,000 (well £90,000 as the 25% is tax-free) which would mean a lot of it would be taxed at 40%. You would then claim it back at the end of the year by asking HRMC to do a tax return.

    To avoid this we took out smaller amounts from my wife's plan over several months. Also because it was the only income we had given the Prudential her tax code so they only deducted the required tax. On the statement they sent it had 25% of it tax-free and then the remainder was taxed according to the tax-code amount.
    nadiastanbridge likes this.
  7. pauljoecoe

    pauljoecoe New commenter

    Interesting. I need to think about this from September.

    So, say I have £150,000 in the AVC pot and I want to take it out over a period of time as quick as possible minimising the tax.

    When I say minimise I mean keeping it to the 25% bracket, bearing in mind a pension income of around £15000 per month.
  8. diddydave

    diddydave Established commenter

    lol...with a pension income of that amount you won't! :D:D:D I presume you meant £1,500 a month.
    Also there is no 25% bracket...there is a 21% bracket if you are in Scotland and their 40% bracket starts at £43,431. I'll presume, you are not in Scotland. In England it is £50,000.

    £1500 a month used up £18,000 of your tax allowance. So you have £32,000 of the 20% bracket left to use. (Don't forget to deduct any other income you have, i.e. bank interest etc that's over the £1000 'free' limit)

    You have several choices to fulfil your aim.
    1) Buy a drawdown plan (can be with Prudential but you can shop around).
    This allows you to take out 25% of the whole sum tax-free straight away.
    So you get £37,500 immediately and then can drawdown the remaining £113,500 over subsequent years. That would need 4 years of using your 'spare' £32,000.
    2) Similar to above but you can buy a fixed-term annuity. You get the same tax-free sum up front and then are paid an agreed amount for the next 4 years.

    [Note I'm not totally clear on the difference between the above 2 options]

    3) You can do ad-hoc drawdowns, taking out lump sums as and when you want, with 25% of each one tax-free. With this you don't get the big £37,500 up front at the start but it also means that the remaining investment, should it grow, also means your tax-free share grows with it.

    Something to bear in mind and to check with Prudential is how they will be applying the Market Value Reduction (MVR)...I've heard that if you use the fund on the day you have given them then there is no MVR but if you go before OR after that date they can.
  9. nadiastanbridge

    nadiastanbridge New commenter

  10. nadiastanbridge

    nadiastanbridge New commenter

    Thank you so much for taking the trouble to reply diddydave ... I have read many of your other comments and admire your expertise! Unfortunately, my plan is old and with Sun Life Of Canada. They do not allow people to withdraw money in chunks - they say the whole amount has to be taken all at once. It is a very old plan. I would be taxed at 40% on the 75% as I am in service currently and would be over the higher threshold. I thought they would deduct the tax at source. Interesting to know from you how it is calculated. Thank you.
  11. diddydave

    diddydave Established commenter

    £112,500 not £113,500 :) sorry...schoolboy error
  12. pauljoecoe

    pauljoecoe New commenter

    whoops, I meant 15000 a year!
  13. pauljoecoe

    pauljoecoe New commenter

    Thanks for that diddydave. Even though I was clearly confused with my figures! Not been in the UK for a few years so a little out of touch on tax rates. Food for thought.
  14. diddydave

    diddydave Established commenter

    In that case I'd check what kind of policy it is.

    If it is an AVC PENSION policy then you should be able to transfer it to a different pension provider that DOES offer drawdown options. Such a transfer should not lead to a tax liability but you would need to get specialist confirmation of that and ensure you use the correct forms etc! We did transfer a private pension that my wife had into the Prudential Teachers AVC without losing the tax benefit or incurring a tax charge. If you are still in service then you should be able to set up a Prudential Teachers AVC and have it transferred. Or as others have said even into a SIPP. The key is not to take it out yourself and then put it in somewhere else!

    You should also (again check and don't take my word for it) be able to 'buy' a fixed term annuity with the money without incurring tax charges. The problem with this is that it then has less flexibility than the ad-hoc drawdown amounts in that you cannot adjust the amounts you take out in the future to match changing tax and income conditions.

    If its just an investment policy, like the old endowment ones used to pay off mortgages then there should be no tax to pay. The simple test for this is whether you invested money before or after you paid tax on that money. If you paid it in and didn't pay tax then you will probably have to pay tax on money taken out (other than the 25% tax-free bit).
  15. diddydave

    diddydave Established commenter

    No worries, the figures are very close ...you'd be able to take out another £3k each year then.
  16. pauljoecoe

    pauljoecoe New commenter

    Also, as I will be returning UK in September I will only start receiving income in UK from then. So my income in 20-21 tax year will be less 4-5 months less than usual so I guess I should take more out this year. (Except that it may be best to leave it for a while to recover from current economic issues!)

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