Author Topic: Take TFLS from DB pension (or not)  (Read 1302 times)

poppydog

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Take TFLS from DB pension (or not)
« on: January 17, 2018, 09:39:14 AM »
(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
« Last Edit: January 17, 2018, 09:40:58 AM by poppydog »

cerat0n1a

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Re: Take TFLS from DB pension (or not)
« Reply #1 on: January 17, 2018, 10:03:14 AM »
Seems like you are taking the correct approach by focusing on actual post-tax income and I am inclined to agree that on the basis of the information given, you should take the lump sum.  Maybe also some actuarial considerations come into play - the ungenerous commutation rate makes me think they see you as a good bet for lasting a long time.

I guess one key piece of information is whether your ISA allowances are going spare - you could shelter 80k pretty quickly that way in March/April. I assume not, though.

I would also check out the possibility of deferring state pension, as described here:

https://www.gov.uk/deferring-state-pension/what-you-get

Obviously, that would allow you to get under the 40% rate for the period you're deferring, at the "expense" of having more income later - maybe that can be used to your advantage somehow?

poppydog

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Re: Take TFLS from DB pension (or not)
« Reply #2 on: January 17, 2018, 10:13:23 AM »
Thanks for the reply.  I'll look into deferring the state pension - I believe that the increments for deferring though are being sharply reduced, so that may be a factor.

I'm getting other lump sums from defined contribution pension funds, and that is already earmarked for the next ISA allowance - good advice though, and thank you again.

PD

PhilB

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Re: Take TFLS from DB pension (or not)
« Reply #3 on: January 17, 2018, 03:48:27 PM »
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%.
At the risk of being picky, that's 17.2x not 17.2%.
The key question is how well your DBs and SPs cover your core spending.  If that's still well covered with the reduced pension then the value of 'certainty' on the extra drops considerably.
Personally I would lean strongly towards taking the lump sum.  If the extra pension is going to be taxed at 40% then the lump sum represents nearly 29 years of post tax foregone income even before factoring in any above inflation investment returns.  Add in the fact that it is 100% inheritable by your wife if you predecease her whereas the DB presumably is only 50% or less plus inheritability for kids and added flexibility and it looks very attractive indeed. 

ExitViaTheCashRamp

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Re: Take TFLS from DB pension (or not)
« Reply #4 on: January 17, 2018, 03:54:20 PM »
Don't forget the option of starting a new DC pension with your lump sum and put up to 40K per year into it and claim tax relief at your marginal rate !
« Last Edit: January 17, 2018, 04:10:13 PM by ExitViaTheCashRamp »

poppydog

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Re: Take TFLS from DB pension (or not)
« Reply #5 on: January 18, 2018, 03:50:31 AM »
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%.
At the risk of being picky, that's 17.2x not 17.2%.
 

Of course!  Schoolboy typo error.  Our core DB and DC pensions are more than adequate - we're very lucky.  Thanks for your insight ref. the core question.

poppydog

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Re: Take TFLS from DB pension (or not)
« Reply #6 on: January 18, 2018, 03:52:35 AM »
Don't forget the option of starting a new DC pension with your lump sum and put up to 40K per year into it and claim tax relief at your marginal rate !

Thanks for the reply.  We'll be retired soon, and the ability to put 40K into pensions is limited to "relevant earnings" which is pretty much earned income, not pensions.  HMRC very much frowns upon "pension recycling" of the type you suggest......

ExitViaTheCashRamp

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Re: Take TFLS from DB pension (or not)
« Reply #7 on: January 18, 2018, 02:59:29 PM »
Ah... but if you are mustachian I assume you have a fairly large pot lying around - shove those savings into a pension this tax year (40k for you, 40k for your wife or whatever is left of your annual allowance), gain tax relief - refill savings pot with DB pension withdrawal which will be available early in the next tax year.

 Maybe this doesn't suit your needs/situation at all - but if it was me and my situation, I would be looking to maximise the free cash on offer from the government with this early withdrawal.

poppydog

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Re: Take TFLS from DB pension (or not)
« Reply #8 on: January 19, 2018, 12:34:11 AM »
Thanks Exitvia for the post.  For 2017-2018 were already maxed out in terms of pension contributions. For 2018-2019 we will only have one month of relevant earnings and Ill do exactly as you suggest. Thankfully for me April includes my annual bonus which will be the final piece in our stache jigsaw.

Thanks again.