PCLS - Should you always take it?

Parking_Trouble · 14 November 2017 at 12:03PM

Is it always best to take the full 25% tax free lump sum?

What criteria need to be considered?

Commutation rate for my main DB pension is 17-1

If I take into account my 2 DB pensions, plus state pension I will probably go into the 40% tax band by £2k - £3k

Should the objective be to keep in the lower tax band by taking some cash?

I could transfer the smaller DB pension to a flexible drawdown and keep below the 40% threshold.

KingOfTheDaves · 14 November 2017 at 12:27PM

If you want to get the maximum amount of money out of the pension then (assuming typical life expectancy) it is usually better to take 100% pension and no cash.

However, most people end up taking a lump sum as they would rather spend/travel/enjoy life whilst they are still young and active enough to enjoy it.

The correct answer ultimately depends on you and what your goals/plans are. Do you need the 25% cash.

cloud_dog · 14 November 2017 at 12:39PM

Parking_Trouble wrote: »

Is it always best to take the full 25% tax free lump sum?

What criteria need to be considered?

Commutation rate for my main DB pension is 17-1

If I take into account my 2 DB pensions, plus state pension I will probably go into the 40% tax band by £2k - £3k

Should the objective be to keep in the lower tax band by taking some cash?

I could transfer the smaller DB pension to a flexible drawdown and keep below the 40% threshold.

If your primary focus is to reduce your income tax liability then the answer is 'Yes'.

Excluding the 25% all money obtained from a pension fund counts towards your income tax liabilities (whatever level they may be).

So the goal generally, is to take the 25% and try to get it in to an ISA (or some other tax efficient vehicle) so that any income derived from those monies do not count towards your income tax, or indeed any allowances if within an ISA.

pip895 · 14 November 2017 at 12:42PM

There could be a couple of advantages to moving one of the DB pensions into drawdown. Particularly if you don't need the income to do what you want in retirement.
The first is avoiding 40% tax the second is that a SIPP is currently a very tax efficient way of passing money on, if that is of interest.

You would need to ensure you are not going to hit the LTA though.

Northamptonblue · 14 November 2017 at 1:52PM

I took a lump sum from a private company DB pension at a commutation rate of 24. My teacher’s pension, however, has a rate of 12. This is a pretty poor deal even when tax free so not an option when it comes due in five years time.

As always, the devil is in the detail.

green_man · 14 November 2017 at 2:15PM

It’s not always best, no. It very much depends on your circumstances.

In your case 17/1 isn’t a great comutation rate (how old are you?) but it would likely be advantageous to take enough to reduce your pension income below the 40% band.

My wife recently retired from the Police (aged 50) and took zero lump sum. In her case we had no need for the lump sum and her lack of financial discipline led us to believe it would all have been spent within 5 years, much better with 30+ years (hopefully) of additional income.

Anonymous101 · 14 November 2017 at 2:35PM

As others have said its very personal however purely from a tax point of view its better to take the 25% lump and reinvest this in an ISA.

kidmugsy · 14 November 2017 at 4:14PM

Someone with a money-purchase pension with an attractive guaranteed annuity rate might consider not drawing the lump sum.

As for the OP with his 17:1 - depends on whether he has a compelling need or desire for capital. I took max TFLS (admittedly at more than 17:1) from my principal DB pension. Reasons included (i) I had debts to clear, and (ii) with unusual sunny optimism I thought I could invest it successfully, and (iii) I thought the DB scheme was badly run; I was pessimistic about its future. No regrets so far.

In the OP's shoes I'd probably use one of his two suggestions for avoiding higher rate tax.

Triumph13 · 14 November 2017 at 4:36PM

I'd definitely be running the numbers on transferring the smaller DB and using some of the proceeds to defer the SP. As others have said, in the end it should come down to whether the capital or the income is more useful to you. When it comes to tax, don't let the tail wag the dog.

Parking_Trouble · 14 November 2017 at 4:49PM

green_man wrote: »

It’s not always best, no. It very much depends on your circumstances.

In your case 17/1 isn’t a great comutation rate (how old are you?) but it would likely be advantageous to take enough to reduce your pension income below the 40% band.

My wife recently retired from the Police (aged 50) and took zero lump sum. In her case we had no need for the lump sum and her lack of financial discipline led us to believe it would all have been spent within 5 years, much better with 30+ years (hopefully) of additional income.

I will be 60 in May next year, my NRA for main pension.
Getting CETV value for that out of curiosity but doubt it makes sense to transfer.

I have been paying in a lot of salary sacrifice AVCs so I will be able to pay off debts and have some left over but would still be able to take another big lump to use up the 25%. 17-1 not good though.

I think taking 25% from other DB pension and leaving the rest in a flexible drawdown might keep me below higher rate tax and around £80k that I won't need to touch for day to day living costs.

Parking_Trouble · 14 November 2017 at 4:53PM

Triumph13 wrote: »

I'd definitely be running the numbers on transferring the smaller DB and using some of the proceeds to defer the SP. As others have said, in the end it should come down to whether the capital or the income is more useful to you. When it comes to tax, don't let the tail wag the dog.

Both I suppose but a comfortable guaranteed income is probably priority and enough savings to fund a few decent holidays and subsidising the kids!

PCLS - Should you always take it?

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