Details on pension lump sum tax

Tax treatment of retirement benefits

Any income taken from a registered allowance scheme is treated as earned revenue. This is applicable to every kind of scheme, whether benefit or defined contribution.

Nevertheless it is very important to recollect the strict rules re pension lump sum tax . When you retire or take your initial lump sum from your pension, this is paid to you free from earnings or capital gains tax. The one-off sum from your annuity is called either Tax free cash or pension lump sum.

Revenue from the basic state annuity and further state pensions hasn't got tax deducted at the source, but is taxable. The individual's tax code is reduced to make allowance for the payment of the state benefits Annuity Credit payments are tax-free.

An allowance is a contract offered by an insurance firm to provide steady income, paid at least annually to the individual, routinely for the remainder of their life. The pension is routinely acquired by a lump sum payment. As we all know, at least 75 percent of a pension fund need to be used to provide an income, which is mostly prepared by purchasing an allowance Pensions fall under two headings

1) Compulsory purchase pensions – these refer to any annuity that an individual has purchased as a part of an annuity arrangement. Revenue from these allowances is usually taxed as earned income through the PAYE system, with the pension provider effectively acting as ’employer ‘

2) Acquired life annuities – these are annuities that the individual has selected to buy, outside of any allowance arrangement – with investment funds or an allowance tax free lump sum Income from these annuities is treated as a part return of capital (tax free) and, in part, interest (taxable)

If an individual has no obligation for money and simply wants to maximise revenue, it may still be worth considering taking the maximum tax-free cash from a pension and using it to purchase a acquired life pension, which is more tax efficient Exactly the identical process applies when the individual takes income right from the annuity fund in the shape of revenue withdrawals.

If you have any questions regarding pensions or financial advice, it is always recommended to seek expert fianancial advice from a financial adviser, who can put you on the right path for your financial future.

Early Pension and Early Retirement are key issues looked at by My UK Pension Plan, an online service which connects individuals with Financial Advisers

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