There are tax rules of interest to those teachers with a small pension with the Teachers’ Pension Scheme. A small pension is defined as a fund with the actuarial value less than £10,000. These rules are part of the Finance Act of 2014.
A simple summary of taxation rules
The tax rules relating to pensions split the payment of lump sums into authorised and unauthorised payments. Unauthorised payments are subject to taxation. The assumption is that a smaller pension fund will be one of many pensions possessed by the individual. Therefore, when calculating benefits, other registered pension schemes have to be accounted for.
To avoid pension funds having to pay out regular payments of small amounts and so incur administrational costs, it was possible to take the money as a small lump sum. Up to a limited number, this lump sum would be authorised and so would be exempt from tax.
From March 2014, benefits from a single source increased from £2000 to £10000. The age limits were also changed from 60 to 55 as well as the removal of an upper limit. You also do not have to consider any other pensions, as there is technically no restriction on the number of small lump sums you can take. However, the HM Treasury does stipulate only three small lump sums can be taken tax-free.
Things to consider
25% of any defined contribution pension that is taken as a lump sum should be tax-free – no matter the size of the pension. If you take the remaining 75% in a single payment of this more substantial lump sum, it will be subject to taxation. If your regular pension fund payments to yourself exceed your personal allowance, you will also be taxed on this amount too.
You should also be aware that taking a Small Lump Sum will stop all future rights and benefits in the scheme, which includes dependents and death benefits. You should consult with an Independent Financial Adviser to assess if the taking of the lump sum is in your best interest in the future.
The content in this article was correct on 5th September 2020. You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on your teachers’ pension scheme, as well as financial matters in general. Please use the contact form below to arrange an informal chat with an advisor and see how we can help you.