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Pension lump sum - taxed or not?

(4 Posts)
taxcalculator Thu 29-Sep-16 14:54:27

My partner was pensioned off from his work at the end of last year for health reasons. He took a lump sum from the company pension, that arrived in January 2016 and also receives a small monthly pension that amounts to approx. £5k pa. He is now working on a freelance basis in a way that doesn't impact his health.

My partner is under the impression that the lump sum he received is 'tax free'. I am worried that he has got this wrong and in fact he will have to pay tax on it at a rate of 40%. (His earnings prior to January were already taxed via PAYE and he was already up to the 40% bracket)

He hasn't employed an accountant yet and I am sure that he will do so soon, but in the meantime I thought I would ask on here. Anyone able to advise? TIA

Nightofthetentacle Thu 29-Sep-16 15:06:38

If he has a simple(ish) defined contribution scheme, then it's likely he could take 25% of the fund value tax free as a "Pension Commencement Lump Sum". For DB schemes the % may vary, and there could also implications if he had a very large pension (i.e., it was in excess of the 'Lifetime Allowance').

This lot are pretty good and can provide free information on his specific circumstances, they are funded by the DWP :

taxcalculator Thu 29-Sep-16 16:48:28

Thanks NightoftheTentacle I will check that site out. Not sure if the lump sum represents 25% of the fund value but I can have a look through the paperwork.

CumbrianExile Thu 29-Sep-16 16:59:24

For most DB schemes it is also 25% if the fund value (slightly complicated calculation but it amounts to the same thing).

The paper work should specify that it is tax free (I work for a company pension scheme, all documentation has to mention that the lump sum is tax free!).

My main concern with your op is that you mention he was pensioned off on ill health but is now working (albeit in a way that will not affect his health). Sometimes there is conditions on ill health retirement that mention you have to let the scheme know if you take on any kind of work following being granted ill health pensions as it may no longer be applicable. I believe you don't have to pay anything back if they do decide your DH no longer qualifies, they will defer any future payments though. I would check on that, it should be in the paperwork provided by the scheme.

If he just took his pension early because of ill health, and it wasn't specifically an ill health pension ignore the last paragraph.

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