Tax treatment of lump-sum benefits from a registered annuity scheme

By Aharon Deans

Tax treatment of lump sum benefits from a registered annuity scheme

It is vital to grasp the rules surrounding pension lump sum taxation when you start reviewing your retirement plan and system

When an individual takes benefits from a registered pension scheme, a maximum of 25 per cent of the fund can be taken as tax free cash This is known as the pension commencement one-off sum.

This is typically to a max of 25 % of the lifetime allowance, but could be higher if the fund is covered by special transitory protection.

At some specific point (at the very latest, on reaching the age of 75) an individual will need to choose whether or not to take the pension commencement lump sum and, if that is the case how much to take. Quite often the maximum annuity commencement payment sum will be taken. From a tax standpoint, this is going to be more fascinating since the annuity commencement payment lump sum is tax free, whereas any extra revenue from the fund that remains will be taxable

Obviously, taking the maximum annuity commencement one-off sum will reduce the level of revenue from the remaining fund For a affliate of the final revenue scheme, this is something that must be considered carefully since the annuity revenue can include dependants ' benefits and will be on an inflating basis, but many schemes pay no attention to any payment taken when figuring out dependants ' benefits Retirement allowance contracts often have high levels of assured pension rates and taking these raised levels of revenue may be more fascinating than taking the cash.

Many counsellors will supply an investing methodology, which does within an annuity, for instance inside ISAs or Bonds for their customers to invest the full tax free money or pension commencement one-off sum if the customer needs the maximum income. This would be in opposition to having an immediate need for the cash payment, as an example to pay off a mortgage or other responsibility. This will so mean that there may be earnings payment from the annuity commencement one-off sum nevertheless , this would be much more tax efficient or potentially even free from tax in the clients hands if ISAs are utilised.

About the Author:

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