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Where Taxpayers and Advisers Meet
Tax Insider Tip: Take Your Tax-Free Lump Sum
06/02/2013, by Tax Insider, Tax Tips - General Tax
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By taking the lump sum option offered on most personal pension schemes you receive a tax-free lump sum and purchase an annuity with the balance.

Because the annuity is taxable whereas the lump sum is not (as long as it does not exceed 25% of the pension fund), you can be considerably better off from a tax viewpoint by taking the lump sum.

Example:

Upon retirement Alex is offered the choice of:
•    a straightforward annuity for his pension fund of £100,000 of £6,000 per year, or
•    a lump sum of £25,000 and an annuity of £5,000 per year.

By taking the latter lump sum option he saves tax yearly on the amount of the annuity forgone.

He also has the opportunity to invest the lump sum to generate additional income (although any income earned may be taxable in its own right depending on the nature of the investment).

About The Author

The above article is taken from 'Tax Insider,' TaxationWeb's own publication specifically for taxpayers and their advisors. 'Tax Insider' is a monthly magazine containing numerous tax tips, articles, questions and answers from leading tax experts, aimed at helping taxpayers to save tax and reduce their liabilities.

To register and download free copies of Tax Insider, and for details of special offers and how to order, visit: www.taxinsider.co.uk

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