Pension tax refund: Can I claim tax back on my pension lump sum?

We will use your email address only for sending you newsletters. Please see our Privacy Notice for details of your data protection rights.

Pension payments are given to you from the day you retire for the rest of your life. Usually, your pension is paid to you in monthly payments, but there are also other ways some wish to receive their retirement income.

Can you claim tax back on your pension lump sum?

A lump sum distribution is a one-time payment from your pension administrator.

By taking a lump sum payment, you gain access to a large sum of money, which you can spend or invest as you see fit.

You can use form P55 to reclaim an overpayment of tax when you have flexibly accessed your pension pot, but not emptied it.

In the UK, you can usually take up to 25 percent of the amount built up in any pension as a tax-free lump sum. Access the claim form HERE.

The tax free lump sum doesn’t affect your Personal Allowance.

Tax is taken off the remaining amount before you get it.

The Government website Gov.uk has provided an example:

Your whole pension is worth £60,000. You take £15,000 tax-free. Your pension provider takes tax off the remaining £45,000.

When you can take your pension depends on your pension’s rules, but it’s usually 55 at the earliest.

You might have to pay Income Tax at a higher rate if you take a large amount from your pension.

You could also owe extra tax at the end of the tax year.

If you’re pension is worth up to £10,000, you can usually take it in one go.

DON’T MISS
State Pension and self-employment: Key points to note for retirement [INSIGHT]
SSAS pension: What is SSAS pension? Is a SSAS regulated? [EXPLAINER]
How savvy Britons are getting the latest money saving tips for free [INTERVIEW]

This is called a small pot lump sum, and if you take this option, 25 percent is tax free.

You can usually get up to three small pot lump sums from different personal pension and unlimited from different workplace pensions.

If all of your private pension is worth up to £30,000 or less, you can usually take everything you have as a tribal commutation lump sum.

This option also lets you take 25 percent of the sum tax free.

However, the Government states that if this lump sum is paid from more than one pension, you must:

  • have your savings in each scheme valued by the provider on the same day, no more than 3 months before you get the first payment
  • get all payments within 12 months of the first payment

If your life expectancy is less than a year, you may be able to take all the money in your pension as a tax free lump sum,

However, all of the following must apply:

  • you’re expected to live less than a year because of serious illness
  • you’re under 75
  • you don’t have more than the lifetime allowance of £1,073,100 in pension savings

Source: Read Full Article