Can you give me a simple explanation about pension.

[Pollypensioner]

I am due to retire in a few months. Work for local council and have a LGPS pension.
I am widowed and not good with forms.
i know I will pay tax on my work pension at 40% because I have state pension and late husbands RAF pension.
I can either have small lump sum (£10000) and a £600 - after tax pension or large lump sum (£60000) and smaller monthly pension (£400) - all figures roughly right.
i want to take large lump sum and people say it’s tax free but others say only 25% is.
I can’t make head or tails out of the info or whether I am doing right thing. What exactly do you get.

The best source of information is the government, have you checked gov.uk site? Be good to get your facts straight.

No such thing as not good with forms, nobody likes them and everyone finds bureaucracy and forms intimidating but please spend a bit of time to properly research this. I used to think I was crap with forms but have had to grow up about it.

The information is all available, sounds like you are in a financially strong position either way so may even be worth to get an account for a bit or financial advisor

Your LGPS pension is a Defined Benefit pension - that means, you will be entitled to a certain amount each month for life. The exact amount is determined by how much you contributed. This is similar to what used to be known as a ‘final salary’ pension.

Everyone is allowed to take up to 25% of the value of their pension as a tax free lump sum. So, the whole of that lump sum is tax free.

For people who have a ‘defined contribution’ pension, it’s quite simple to work out - they know how much they have in their pot, and they can take a quarter of it.

For you, there will be a calculation (which your pension provider will do, you don’t have to do the maths!) to work out how much your pension is ‘worth’. That’s just a theoretical number, you’ll never see all that money in one go. But they do it for various reasons, including working out how much you can take as a tax free lump sum. You don’t have to take 25%, but if you do you won’t pay any tax on that.

Once you know those numbers, you can think about how you want to finance your retirement. Some people want a lump sum now to pay off their mortgage or something.

Other people prefer the security of knowing they will have a higher income for life. It’s totally up to you and your circumstances.

You should speak to Penions Wise and your provider - they should be helpful.

You mention paying 40% tax on your pension. You will only pay 40% on income over £50270 a year. Is your state pension and widows pension going to take you over that amount?
Your lump sum will be tax free. The larger lump sum will be the maximum that you can take tax free.

Thank you everyone - I am just a bit overwhelmed by all the figures and conflicting advice. I have read all the documentation and been on government site but I was confused about what is taxed and what isn’t.
Thank you for your time.
I assume it’s 40% as my tax on my wages went up massively when I claimed my state pension - I have worked a year after my 66 birthday.
I was left some money after my husbands accident - I will not use it - it will be for my children so that sum is taken into account as well.

The 25% limit is the highest lump sum you can apply for and for you It's £60000. It's a sliding scale with the amounts you quoted as the lower and upper ends of the scale. You can also apply for anything in between. So if you decided you wanted a higher monthly amount you can put that figure into the online calculator and it would give you a calculation for a reduced lump sum.
LGPS are managed regionally so get onto yours and find out when their next roadshows or webinars are scheduled for. They're really helpful. Employers should give you time off to attend.

Thank you - I realise now what the 25% is - that’s where I was getting confused. I have logged into the portal and seen the sliding scale - I feel more confident about it now.

You should speak to a financial advisor or Pensionwise. It’s really important you understand the implications of any of your decisions

Here is the link. Pensionwise link

Add up your State pension, survivors pension from your husband and any income you earned since April, plus the annual maximum LGPS pension you could receive up to next April. If it is above £50270 any amount above that figure will be taxed at 40%. Any amount between £12570 and £50270 will be taxed at 20%. Below £12570 is tax free.
Your lump sum from your pension is completely tax free.

So, as an example,
‘State pension £12574
husband’s pension £15000
earnings April - November £32000
LGPS November - April - £5000
Total 12574+15000+32000+5000=64,574- 50270=14,304 above threshold taxed at 40%, (£5721 tax payable)
50270-12574=37,696 taxed at 20% (£7539 tax payable)

gross income = £64574
tax payable = 5721+7539=13,260
net income = 64574-13260=51,314 which is £4278 per month income.

I wonder if the confusion arose partly because when you are drawing from a private pension pot (as opposed to starting to claim a defined benefit pension and deciding how much lump sum to take), the first 25% of that pot is tax free.

Pensionwise do not give advice on DB pensions. Financial advisors tend to have little real knowledge of them. OP will be able to access advice through her workplace.

Im not sure what you mean by the last sentence?
If you have money in savings then only the interest will be taxed after the threshold of £1000 (500 if higher rate tax payer) if you do have money in normal savings that will earn more that amount of interest then you should move it into ISAs. You can put 20k a year into isas, either cash or S&S

It’s in an ISA and the remainder in a high interest saving bond.

Your work should offer webinars and various other resources as you approach retirement. There should be a dedicated pensions team that you can contact to arrange attending.

I would take the biggest tax free lump sum you can if indeed this pension is going to be taking you into the 40% bracket or more into it. You're going to be more than happy at that amount of pension. You can then use the tax free amount for whatever you want it to pass onto children. Ditto the money you have set aside from the accident. With this Gov taxing pensions and your estate at 40% after allowances it's better to spend it or pass it on during your lifetime. Yes do see an IFA.

You only pay 40% tax if your relevant income is over the higher rate tax threshold, which it could well be for this tax year due to your current salary and all pension income.

You say you're due to retire 'in a few months', in that case I wonder if it's worth not retiring until after the end of the current tax year, eg at the end of April instead of the end of March as it could save you a lot of tax as you won't have much of your own salary contributing to your earnings. If you have leave available to take in early April, you probably won't need to work much of that time.

But if you're at all unclear about all this it could well be worth paying for some advice from specialist in public sector pensions who can look at all your circumstances. Your union often has a tied advisor but I've also often seen Pengage recommended, which is where I plan to start when I start seriously planning to retire. They have a very active Facebook page, which would be a good place to look.