Pension question

[HirplesWithHaggis]

DH is rapidly approaching retirement age, and an old pension provider has contacted him. He's been offered either a few thousand a year, with (smaller) amount for me should he die first, or a lump sum plus smaller annual payments. The lump sum is in the area of £50k, he earns not much over NMW. Would the lump sum be taxed, and if so, at what % rate?

He can take up to 25% of his pension pot tax free. The lump sum offered by the pension provider should be 25% of his total savings with that provider, so it would be tax free if he takes it.

If you elect not to take the tax-free lump sum then 25% of the annual pension would be tax-free which is handy if drawing other pensions and are over the tax threshold, not so good if pensions are so low that you are not liable for tax anyway (although with SP not being far away he could be close to this amount).

As a general rule of thumb (i.e. I am NOT an IFA so take no notice of what I say), with no-one knowing how long they are going to live/draw the pension, it is often advised to take the tax-free lump sum on retirement..

Many thanks to you both.

"Would the lump sum be taxed, and if so, at what % rate?"

Just to add to the above. If he takes more than the 25% tax free then that is taxed as though it were income.

So anything above the 25% he would have to pay income tax on at 20%. It sounds as though the £50k may be the 25% that he can take tax free (please do check though).

If he wants to take more than that (and so have an even smaller annual pension) then he will have to pay income tax on the amount above 25% (£50k) as if it were income in that year.

But there again, if he's getting a full state pension, which from 2024 will be £221 per week (£11,502 per year) then that's not far off the current tax free allowance of £12,750 anyway so there's not really much difference. He will have to pay tax on the pension whether he takes the extra amount as a lump sum or an annual pension.