UK tax on pensions

[brewsterbudgen]

I will get my defined benefit/final salary pension in a few years.  I'm waiting until I'm 65, to maximise the lump sum payment.  If I'm still living in Thailand when I take it (I've lived here for 17+ years) do I still get the first 25% of the lump sum tax free?

Edited March 4, 2023 by brewsterbudgen

[Chomper Higgot]

Yes.

 

 But think carefully about doing do.

 

If you don’t take the 25% tax free lump sum then your monthly pension payments are each 25% tax free, the impact is significant over just a few years.

 

If you’ve not done so check your state pension NI contributions and give careful consideration to what address you give HM Gov.

Edited March 4, 2023 by Chomper Higgot

[treetops]

The lump sum is by definition 100% tax free and you are taxed (subject to allowances etc) on the remaining 75%.

 

Unless you have a specific, valid use for the lump sum, the usual advice is not to take it but to take 25% of your ongoing income tax free if your scheme allows it.

[topt]

On 3/4/2023 at 8:52 PM, Chomper Higgot said:

If you don’t take the 25% tax free lump sum then your monthly pension payments are each 25% tax free, the impact is significant over just a few years.

 

On 3/4/2023 at 9:25 PM, treetops said:

but to take 25% of your ongoing income tax free if your scheme allows it.

Guys can you elaborate a little on this as I started to take a defined benefit monthly payment in this current tax year. I don't remember reading about this as an option anywhere although it makes sense when you think about it.

 

If the scheme doesn't allow it do you apply somehow in your tax return or..............?

[Mike Teavee]

On 3/4/2023 at 8:52 PM, Chomper Higgot said:

If you don’t take the 25% tax free lump sum then your monthly pension payments are each 25% tax free, the impact is significant over just a few years.

Does this mean you're drawing down the 25% Tax Free sum over the years or the 1st 25% of your monthly pension payments are tax free... 

 

E.g. If somebody had a 6,000 per month pension would that mean their personal tax allowance is effectively 30,570 pa (12,570 PTA + 1,500 pm from 25% of their pension) . 

 

 

 

 

I'm planning on taking the 25% for no other reason that to lower the taxable income I get in the UK but if I can get 25% of the payment tax free on top of my normal personal tax allowance then it makes sense not to take it.  

Edited March 12, 2023 by Mike Teavee

[Mike Teavee]

Have done as much research as I can on this & can find no evidence that if you don't take your 25% tax free lump sum you can take your Defined Benefit (Final Salary) Pension income at 1st 25% tax free so can only think that people are talking about Defined Contributions or Draw Down income type pensions. 

 

I'm still got 2 years & 10.5 months away from mine (60) so things can always change but as it stands I'll be taking the 25% lump sum even though I don't need it, just want to lower my UK Tax.

 

As a Bonus it seems the GF will get the same pension (50% - age adjustment or the total amount) whether I take the 25% or not.

 

Edited March 15, 2023 by Mike Teavee

[treetops]

8 hours ago, Mike Teavee said:

Have done as much research as I can on this & can find no evidence that if you don't take your 25% tax free lump sum you can take your Defined Benefit (Final Salary) Pension income at 1st 25% tax free so can only think that people are talking about Defined Contributions or Draw Down income type pensions. 

I was definitely referring to DC type pensions but a quick google search threw up this article which suggests it's also true for DB pensions, although not so simplistic and different rules may apply across different providers.

 

https://www.thisismoney.co.uk/money/pensions/article-9574993/Should-25-tax-free-lump-sum-final-salary-pension.html

 

Edited March 15, 2023 by treetops

[Mike Teavee]

3 hours ago, treetops said:

I was definitely referring to DC type pensions but a quick google search threw up this article which suggests it's also true for DB pensions, although not so simplistic and different rules may apply across different providers.

 

https://www.thisismoney.co.uk/money/pensions/article-9574993/Should-25-tax-free-lump-sum-final-salary-pension.html

 

Many Thanks, very interesting article & sums up exactly the thought process I’ve been going through about taking the tax free lump sum from my DB pension. 

 

I see there were some very positive changes to private Pensions yesterday but one of the negative ones was the 25% tax free sum is now capped at 25% of the current Life Time Allowance so approx. £268,275 which sounds like a lot of money but could easily be breached (not by me!) as it’s due to remain that way for some years. 

Edited March 16, 2023 by Mike Teavee

[Chomper Higgot]

13 hours ago, Mike Teavee said:

Have done as much research as I can on this & can find no evidence that if you don't take your 25% tax free lump sum you can take your Defined Benefit (Final Salary) Pension income at 1st 25% tax free so can only think that people are talking about Defined Contributions or Draw Down income type pensions. 

 

I'm still got 2 years & 10.5 months away from mine (60) so things can always change but as it stands I'll be taking the 25% lump sum even though I don't need it, just want to lower my UK Tax.

 

As a Bonus it seems the GF will get the same pension (50% - age adjustment or the total amount) whether I take the 25% or not.

 

But you will already have taken your 25% tax free allowance, so all your pension payments will be fully taxed.

 

If your reason is to save tax paid take a very close look at that.

 

As a general rule, you need the highest income you can obtain from your pensions when retiring to Thailand.

 

Unless you are very careful with how you spend your pension the lump sum will disappear pretty quickly.

 

I’m not saying don’t take the 25% lump sum, rather think about it very carefully.

 

I personally would not take any cash lump sum from a DB scheme, DC is a different matter.

[BritManToo]

11 minutes ago, Chomper Higgot said:

I’m not saying don’t take the 25% lump sum, rather think about it very carefully.

I personally would not take any cash lump sum from a DB scheme, DC is a different matter.

Normal financial advice is to take the largest tax free cash sum you can.

Now the state pension is 10k5 and the personal tax allowance is 12k4, you will be taxed at 20% on nearly all your private pension.

 

I worked out I would need to live another 22 years to break even if I didn't take the largest lump sum. My chances of making it to 86 would be close to ZERO.

Edited March 16, 2023 by BritManToo

[BritManToo]

13 hours ago, Mike Teavee said:

I'm still got 2 years & 10.5 months away from mine (60) so things can always change but as it stands I'll be taking the 25% lump sum even though I don't need it, just want to lower my UK Tax.

 

As a Bonus it seems the GF will get the same pension (50% - age adjustment or the total amount) whether I take the 25% or not.

Agreed, same for me, the 20% tax on your private pension makes a significant difference to the calculation.

No age adjustments on my pension, she gets 65% of my pension before lump sum paid.

Edited March 16, 2023 by BritManToo

[Chomper Higgot]

1 minute ago, BritManToo said:

Normal financial advice is to take the largest tax free cash sum you can.

Now the state pension is 10k5 and the personal tax allowance is 12k4, you will be taxed at 20% on nearly all your private pension.

Normal financial advice doesn’t consider people retiring to a country where they have zero social wage, no free health care, no free prescriptions, no welfare assistance etc.

 

Also, while an assumption I believe in very many cases the tax free lump sum will be spent pretty quickly in Thailand, often on real estate that the expat has tenuous control over.

 

For retirement in Thailand my personal recommendation is maximize pension income and minimize assets that are not under your own direct control.

 

Opinions do of course differ.

[BritManToo]

3 minutes ago, Chomper Higgot said:

Also, while an assumption I believe in very many cases the tax free lump sum will be spent pretty quickly in Thailand, often on real estate that the expat has tenuous control over.

Very little point in saving the lump sum, spend it while you can enjoy it IMHO.

I used some of mine to buy extra state pension.

[Chomper Higgot]

5 minutes ago, BritManToo said:

Very little point in saving the lump sum, spend it while you can enjoy it IMHO.

I used some of mine to buy extra state pension.

Buying extra state pension is a very smart move, the return in investment is extremely good, you only need live four or five years to get full return, it’s gravy every year after that.

[Mike Teavee]

35 minutes ago, Chomper Higgot said:

But you will already have taken your 25% tax free allowance, so all your pension payments will be fully taxed.

 

If your reason is to save tax paid take a very close look at that.

 

As a general rule, you need the highest income you can obtain from your pensions when retiring to Thailand.

 

Unless you are very careful with how you spend your pension the lump sum will disappear pretty quickly.

 

I’m not saying don’t take the 25% lump sum, rather think about it very carefully.

 

I personally would not take any cash lump sum from a DB scheme, DC is a different matter.

Thanks... My goal is to try to minimize the amount of income tax I pay so by taking a 25% lump sump my income will be reduced by approx. 20% pa (based on the Early Retirement quote I got with 3 years to go till I'm 60) 

 

E.g. Using made up figures to make the maths easier... 

   - Pension Pot £1,000,000

   - Income if take no Lump Sump - £40,000pa

   - Tax Payable - £5,486 (20% of £40,000-£12570 PTA)

 

   - 25% Lump Sum £250,000 

   - Income PA - £32,000pa

   - Tax Payable - £3,886 (20% of £32,000-£12570 PTA)

   - Tax Saving £1,600pa

 

I appreciate it's a lot more complicated than this & any gains made by paying less tax / investing the £250,000 would be offset by a reduced pension income that is getting further away from what I could have had every year (Because future pension increases will be smaller).

 

Honestly have no idea what I'll do when the time comes & things can change a lot in the next couple of years but thanks again for giving me lots of food for thought. 

 

 

 

Edited March 16, 2023 by Mike Teavee

[treetops]

18 hours ago, Mike Teavee said:

E.g. Using made up figures to make the maths easier... 

   - Pension Pot £1,000,000

   - Income if take no Lump Sump - £40,000pa

   - Tax Payable - £5,486 (20% of £40,000-£12570 PTA)

 

   - 25% Lump Sum £250,000 

   - Income PA - £32,000pa

   - Tax Payable - £3,886 (20% of £32,000-£12570 PTA)

   - Tax Saving £1,600pa

Not quite if you work on the premise that if you take no up front lump sum but take the tax free amount as part of your regular income (based on these figures) would give you:

 

Income £40,000

Taxable Income £30,000 (25% or £10,000 is tax free)

Tax Payable £3,486 (20% of £30,000 -£12,4570 PTA)

 

Edited March 16, 2023 by treetops

[Mike Teavee]

3 hours ago, treetops said:

Not quite if you work on the premise that if you take no up front lump sum but take the tax free amount as part of your regular income (based on these figures) would give you:

 

Income £40,000

Taxable Income £30,000 (25% or £10,000 is tax free)

Tax Payable £3,486 (20% of £30,000 -£12,4570 PTA)

 

Great for a Defined Contribution / SIPP Pension but Defined Benefits / Final Salary pensions don’t work that way as you either take a tax free lump sum (doesn’t have to be the full 25%) at the start or you cannot take anything tax free at all. 

 

Edited March 17, 2023 by Mike Teavee

[brewsterbudgen]

3 hours ago, Mike Teavee said:

Great for a Defined Contribution / SIPP Pension but Defined Benefits / Final Salary pensions don’t work that way as you either take a tax free lump sum (doesn’t have to be the full 25%) at the start or you cannot take anything tax free at all. 

 

If you live permanently in Thailand, is the first 25% of your Defined Benefits/Final Salary pension still tax free? 

[persimmon]

One advantage of having a SIPP is that it can be passed on free of UK IHT . If the beneficiary is UK resident , they pay tax on any withdrawals at their personal rate . But , if the beneficiary is Thai , in theory , they could inherit the lump sum tax free . In practice though , the situation seems very unclear as to whether the UK pension provider will decide to take off the max amount of tax due ( 40 % ) just to be on the safe side and not annoy HMRC .

I`ve done a bit of research  , but can`t find a clear answer to this .

[cleopatra2]

1 hour ago, brewsterbudgen said:

If you live permanently in Thailand, is the first 25% of your Defined Benefits/Final Salary pension still tax free? 

For DB only the initial lump sum is 25% tax free. Any subsequent pension payments are treated as normal income for tax purposes but exempt for NI payments. ( Caveat it is possible to transfer the DB out of the pension into another pension arrangement. However this is not recommended .)

For DB schemes the lump sum is arrived at by using a commutation process which reduces the future  regular pension payments . 

[topt]

4 hours ago, Mike Teavee said:

Great for a Defined Contribution / SIPP Pension but Defined Benefits / Final Salary pensions don’t work that way as you either take a tax free lump sum (doesn’t have to be the full 25%) at the start or you cannot take anything tax free at all. 

 

Thanks as that was the question I asked earlier of a couple of posters but did not get a response. 

[Mike Teavee]

2 hours ago, brewsterbudgen said:

If you live permanently in Thailand, is the first 25% of your Defined Benefits/Final Salary pension still tax free? 

Yes the lump sum is tax free no matter where you live but if you don't take this at the start of a DB Pension then your pension income is set based on the full amount & you're taxed on it as income (i.e. 20% on everything over the normal £12,570 PTA)

 

 

 

Edited March 17, 2023 by Mike Teavee