Pension lump sum tax question

[webmonkeyuk]

My mum took early retirement about 3 years ago as my dad retired too she is 62yr old and isn't able to claim her state pension yet she has worked over 35yrs, she had 2 small works pensions and took one of them just after she retired taking a lump sum of around £10000 and monthly payments of £130. the other pension she had has changed hands and its been fine sofar but the last month it lost £300 (it was like a stock-shares type from what ive seen) anyway I told her to cash it in if its starting to lose. There was a figure of around £12300 but when it was transferred only £9600 came, ive phoned the pension company to ask why and they said £2800 (roughly) was taken for tax which I thought was too much. ive phoned HMRC and they couldn't give me a straight answer and maybe wait till the end tax year to see if its adjusted.

The previous pension wasn't taxed as far as I can remember and ive been on www.which and tried there tax calculator which her yearly earning which is £1560 as shes not claiming or working and it says if you cashing £12300 you pay no tax. I'm a bit stumped with this, any ideas if its right?

 

[Deleted member 66701]

The figure is correct - you pay the tax upfront and claim any excess back. This is because the pension provider doesn't know your other earnings (i.e. not like PAYE from an employer) so they assume a flat 20% tax rate. The form you need is a P800.

The same happened to me when I took voluntary redundancy. It doesn't take long and I had the excess back within 6 weeks.

 

[Kemik]

When you retire you will have one or more pots of pension funds. The funds will be invested in various securities but it is normally good practice to move them to safer securities such as bonds as you get closer to retirement as there is less risk. 25% of the total value of these funds can be taken as a lump sum tax free. The rest is used to buy an annuity or can now be drawn down on an ongoing basis at the relevant tax rate for the year.

It sounds like your mum had £40,000 in one fund and £12,300 in another taking the total to £52,300. 25% of that can be taken tax free. £30,000 of the £40,000 has been used to buy an annuity (£130 per month income). You asked the pension provider to withdraw the full amount of the £12,300. Only 25% of this is tax free. Some of it will be taxed if it is over the annual personal allowance. They might have taxed in full as they don't know how much income she has. She will be able to claim the overpayment back from HMRC.

 

[webmonkeyuk]

thanks guys, I will get the p800 form and do it for her