Taking a lump sum with cash balance lump sum

[markis]

I will be due to retire shortly at 65. My yearly pension is only £2,395 and my cash balance lump sum is £30,335. My question is what would be the maximum lump sum I could take on the yearly pension, and if the cash balance lump sum is tax free at 65, which then begs the question how can it be tax free if your yearly income , just say is £30,000, then that takes you over the £50,000 so would the tax be 40% on anything over the 50k ?

[freespeech]

I will be due to retire shortly at 65. My yearly pension is only £2,395 and my cash balance lump sum is £30,335. My question is what would be the maximum lump sum I could take on the yearly pension, and if the cash balance lump sum is tax free at 65, which then begs the question how can it be tax free if your yearly income , just say is £30,000, then that takes you over the £50,000 so would the tax be 40% on anything over the 50k ?

The tax free element isn't included as "earnings" for your annual earnings so you will still be a basic rate tax payer. It's the same with voluntary redundancy when the first £30k is tax free.

[markis]

So my £30,000 cash balance lump sum is none taxable , and anything over 50k is taxable at 40% if my total earnings exceeded that.

[SeanMc]

Cash Balance is taxable as UFPLS i.e 25% of it is tax free.

[Jefferson Starfish]

Cash Balance is taxable as UFPLS i.e 25% of it is tax free.

I think you get more of it tax free if you use it to fund your lump sum instead of giving up some pension?

[SeanMc]

Yes but it's not totally tax free.

[markis]

If you look on the ‘Benefit Illustration’ for Age65 Cash Balance fund it states: “This benefit has a normal retirement age of 65 and can be taken as a cash sum.It is tax-free if your benefits are within maximum limits set by HMRC.”

So why are they saying it’s tax free then ?

[mr hil.]

25% of your total pot value is tax free, so multiply your annual pension amounts by 20 then add the total amount of any cash balance, lump sums (sections a or B) and AVCs. You can then take a maximum of 25% of that grand total tax free which is also not counted as earnings so will not count towards any tax calculations.

Any amount of cash balance or AVCs above the 25% figure would be counted as earning and attract Tax if your earnings are above that years tax free allowance (£12570 at the moment)

This is very simplified way to calculate it with many varations as to which section etc you may be in

eg £5K per year pension and £30K DBCB at 65 years old would work out as
5Kx20=100K
+30K= 130K
x 25%= 32.5K Max tax free lump sum

This is the ball park way I have been using to plan my retirement. Very rough calculations just to give an idea. The actual calculations are much more difficult due to the complexity of the RM pensions which only RobertT can fully understand

[Jefferson Starfish]

If you look on the ‘Benefit Illustration’ for Age65 Cash Balance fund it states: “This benefit has a normal retirement age of 65 and can be taken as a cash sum.It is tax-free if your benefits are within maximum limits set by HMRC.”

So why are they saying it’s tax free then ?

They're not!
They're saying if your benefits are within HMRC limits, it's tax free.

Most people's benefits will not be within those limits, so tax will be payable on the cash balance.

[Steve_claret]

Its a no brainer to use your cash balance to fund the NRA65 25% tax free lump sum and not to use any of the annual pension. Doing this reduces the excess cash balance and therefore lowers the amount of tax you eventually have to pay when you cash in the UFPLS