(Originally posted in another forum, but it's very relevant to UK tax policy and I may get a better response here.....)
Here's a question I'd like the forums opinion on. Mrs PD and me are retiring at the end of April. We will both have income from Defined Benefits pensions, and from SIPPs in drawdown, and later on the state pension.
My company's DB has offered a tax free lump sum of £94,195, in return for reducing my DB annual amount by £5,457 - a commutation rate of about 17.2%. Now, I don't think this is particulary generous and my initial reaction was to reject it.
However, I've come to realise that when I collect my state pension in 2.5 years time, the combined income from my DB, the state pension, and the natural yield from my SIPP Investment Trust portfolio (which I intend to harvest) will mean that most, if not all, of that £5,457 extra DB will push me into higher rate tax. At 40%, this will reduce its value to £3,274.
On the other hand, if I take the £94,195 in cash, I can transfer it to my wife, invest it in an unsheltered investment account and pay just 7.5% on the dividends. Higher rate tax will not be an issue for her. At a blended yield of about 4.5% that I'm getting from my ITs, we will net £3,921 to start - and of course we can bed and ISA the £94K over the next few years to eliminate the tax altogether.
Of course, there's the loss of guaranteed income, which is a factor. Also a factor though is the injection of the £95K capital which can be used in later years or inherited by the kids / grandkids.
Do any of the UK MMMers have an opinion on this?
Many thanks
PD