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The Tax-Free Lump Sum

How to use your lump sum

The benefits for people in company schemes can be equally significant.

For example:

1. Your company suggests you take early retirement, “sweetened” by a £50,000 lump sum redundancy payment, of which £30,000 is tax free and £20,000 is taxed at 40% (based on any annual salary paid in that tax year, up to the moment you leave the company’s employment).

2. That leaves you with a total lump sum of £42,000 after tax.

3. You put that money into a personal pension. Because it receives tax relief from the taxman, the amount within the pension actually comes to just shy of £53,770.

4. As you are on higher rate tax, you then claim an extra 18 per cent relief on your £42,000 contribution (the difference between the 22 per cent relief already granted and the additional amount you are entitled to). You get back £7,560.

5. You then retire and take 25 per cent of the £53,770 as a tax-free lump sum. That comes to about £13,442. In total, a combination of reclaimed tax relief and the tax-free lump sum come to about £21,000.

6. You also still have about £40,327 with which to buy a pension, or to allow to grow free of tax until 75, when you are required to buy an annuity with the money.


More pages

Page 1: The Tax-Free Lump Sum – and how to spend it
Page 2: How to use your lump sum

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