No tax, please

[Autolycus]

I have a modest pension from a former UK nationalised industry - just enough that I pay a few hundred pounds per year in Income Tax. I've not claimed my state pension yet, and have been letting the potential lump sum build up over 9 years until it stands at around £65k.
It's about time I took my state pension, and I'm inclined to go for the lump sum rather than the weekly Extra State Pension - we don't really need it but I'm not planning to live for ever and it will be easier for my family to sort out in due course.
But there's an oddity in the income tax regime, as I understand it: if my total pension exceeds the personal allowance, I'll not only pay tax on the income (fair enough), there will be a cliff-edge 20% to pay on the lump sum.
Would it help (and be legitimate) to ask my pension provider to set up a "Payroll Giving" payment of, say £5000, which would then (aiui) be knocked off my P60 total income? I'd save a few hundreds in income tax for this year, and £13k in income tax on the lump sum. A charity would have a few more bob to spend.
What have I missed?
Any better ideas?

[fourstardan]

I have a retired father who had a lump sum and final salary pension, he has just been told about all sorts of tax issues (he can sort out lol).

What do you mean here in regards to "not taking the state pension"?

[Mazinbrum]

Sounds like a plan but you need to time it right bearing in mind there will be delays from the pension provider and state pension people.
https://www.litrg.org.uk/tax-guides/pensioners/wha...

[Autolycus]

replying to fourstardan: State Pensions aren't paid automatically - you need to claim them. The rules have now changed, but really old men (like me) can choose between taking the amount accumulated (plus quite generous interest) as either a lump sum or an increased weekly pension.

Edited by Autolycus on Wednesday 4th January 21:38

[Mogul]

Quite the brain teaser!

Not sure you will be able to avoid paying basic rate 20% income tax on the lump sum when you receive it.

However, it would appear that in your case, there is no chance that any part of it would be taxed at 40% - so that must count as a small blessing.

Looking ahead, it sounds like your overall pension income will increase from around £14k pa today(?) to (for arguments sake) £24k pa once you are in receipt of your State Pension.

Your State Pension (let’s say it’ll be £10k pa) will be paid to you with no tax deducted but your scheme pension administrator will need to know the precise amount so that it can deduct the correct level of tax via PAYE from what it pays you.

If you separately agree with that scheme to start ‘payroll giving’ worth £5k pa (i.e., £416.67/mo being the gross amount receivable by the charity), this should cost you just £4K pa net as the scheme will pay the charity the full £5k including the £1k of income tax that they would have happily paid over to HMRC on your behalf.

E.g., If you can afford to gift £4k pa net, you can divert the £1k of tax that you would have had to suffer directly to the charity in lieu of HMRC.

Your prospective income tax liability will be £2,286 pa (on combined pension income of £24k pa) but your gifting of £5k pa gross will produce tax relief of £1k for you, so your tax bill will be reduced to £1,186 (the same as it would be if your combined pension income was £19k pa).

[Rufus Stone]

I was told by an IFA that when the lump sum is paid tax is deducted based on the tax that would have been paid in the previous years had the pension been paid in those years.

[Autolycus]

Thank you to all who have contributed. I think Mazinbrum's link is comprehensive and balanced, and although there's still some way to go, I have found a little more about my pension provider's rules.

They only work with a very limited range of charities, but since one of them is acceptable, and the charity aspect is really quite secondary, that's OK.

They also have a contribution limit of "50%". I've asked whether this is per pay period or per year, or what, and what the percentage is a percentage of.

It's looking hopeful: keep my adjusted taxable income below my Personal Allowance by maximising ISAs and making sure the lump sum doesn't pay interest in the 2023-24 year. Draw the state pension from part way through the year, and time the charity donations accurately. Consider starting the state pension - to trigger the lump sum - then pausing it for a couple of months or more, thus accumulating another few bob of extra pension when I "un-pause" it.

Calculate twice, cut once.

[Jon39]

Whether the rules have changed I don't know, but think it was the case, that £30,000 could be taken from a pension tax free, any amount over that being taxable.

Probably a simpler way, is to take that tax free cash if requured, receive the State Pension immediately from the normal age, but then not spend any of it. That way, you build up a lump sum, which remains under your control, without any subsequent complications.