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    • peterfelgate
    • By peterfelgate 5th Sep 17, 10:23 AM
    • 4Posts
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    peterfelgate
    Tax Free Lump Sum
    • #1
    • 5th Sep 17, 10:23 AM
    Tax Free Lump Sum 5th Sep 17 at 10:23 AM
    I am in a DB scheme with separate AVCs in the scheme, which can be withdrawn without affecting the DB pension. The value of the AVCs is less than 25% of the total value of the DB pot (AVCs about £50k, DB pot about £560k)
    The scheme is to be closed and frozen, and we are invited to join a new DC scheme. I propose to join the new scheme for two years to benefit from the company's contribution and at the end of the two years I plan to retire. I will take my DB pension on retirement. I wish to take all my DB scheme AVCs as a tax free lump sum as they do not affect my DB pension and the scheme rules do not allow me to buy an uplift to my pension from the AVCs.

    I would also like to take ALL of the DC scheme pot as cash as well, as the total value of the AVCs from the DB scheme (£50k) plus the two year's worth of DC contributions (say £12k) will still be far less than 25% of the DB pension pot., and therefore ought (I hope!) to be tax free.

    Is this possible?
Page 1
    • dunstonh
    • By dunstonh 5th Sep 17, 11:10 AM
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    dunstonh
    • #2
    • 5th Sep 17, 11:10 AM
    • #2
    • 5th Sep 17, 11:10 AM
    The scheme is to be closed and frozen,
    are you sure its going to be frozen? Frozen has a specific meaning and I doubt you really mean that. Frozen is also a very misused term by people who dont know what it means.

    I wish to take all my DB scheme AVCs as a tax free lump sum as they do not affect my DB pension and the scheme rules do not allow me to buy an uplift to my pension from the AVCs.
    Why do you want the 25%? What you request is possible (although it will probably need a pension transfer as most AVCs do not support income drawdown). However, taking the 25% now may not be the best financial solution. For example, it means you cant do phased flexi-access drawdown in the future (which generally results in more tax free cash being taken out over the long term). And you dont get another 25% tfc available in the future even if the fund value doubles.

    If you have a purpose for the 25% then fair enough. However, if its just going to end up in a bank account then that would be a bad move.

    would also like to take ALL of the DC scheme pot as cash as well, as the total value of the AVCs from the DB scheme (£50k) plus the two year's worth of DC contributions (say £12k) will still be far less than 25% of the DB pension pot., and therefore ought (I hope!) to be tax free.
    When? now or when you retire? If now, then you need to be aware of the reduction in annual allowance to £4000. That is a big loss for someone in their final working years.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • peterfelgate
    • By peterfelgate 5th Sep 17, 11:33 AM
    • 4 Posts
    • 1 Thanks
    peterfelgate
    • #3
    • 5th Sep 17, 11:33 AM
    • #3
    • 5th Sep 17, 11:33 AM
    The DB pension scheme is being closed by the company, and pensions in it frozen at current levels, subject of course to future inflation rises. No new funds can be deposited after 30th November 2017.

    The AVCs MUST be withdrawn at the same time as taking the main pension - there is no option to leave them invested if I start to take the pension. I have to take the pension as this will be my main source of income. I will do this when I retire in two year's time. I may put some of the money into another pension but because I will be taking a pension I am limited to putting £10k a year in I believe...

    I want to take the DC funds as part of the tax-free lump sum together with the AVCs in two year's time when I start taking the DB pension.

    As I said, the important thing for me is whether I can take the whole of the DC as part of the tax-free lump sum.....
    • dunstonh
    • By dunstonh 5th Sep 17, 12:09 PM
    • 89,548 Posts
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    dunstonh
    • #4
    • 5th Sep 17, 12:09 PM
    • #4
    • 5th Sep 17, 12:09 PM
    The DB pension scheme is being closed by the company, and pensions in it frozen at current levels, subject of course to future inflation rises. No new funds can be deposited after 30th November 2017.
    That means it is not frozen. Its best to avoid using that term.

    The AVCs MUST be withdrawn at the same time as taking the main pension - there is no option to leave them invested if I start to take the pension.
    Whilst that used to be a mandatory requirement of AVCs, that rule was removed some years ago. However, another option is to transer the AVC to a personal pension if you dont need the money.

    As I said, the important thing for me is whether I can take the whole of the DC as part of the tax-free lump sum.....
    If the scheme allows it, then yes. If they dont then no.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • xylophone
    • By xylophone 5th Sep 17, 12:22 PM
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    xylophone
    • #5
    • 5th Sep 17, 12:22 PM
    • #5
    • 5th Sep 17, 12:22 PM
    subject of course to future inflation rises.
    So your DB pension is not "frozen".

    In effect, you are an "early leaver" - see

    https://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/18/what-is-a-gmp/

    https://www.barnett-waddingham.co.uk/comment-insight/blog/2012/07/24/revaluation-for-early-leavers/

    Are you taking your scheme pension at Scheme Pension Age?

    If not, will there be an actuarial reduction of your benefits?

    Presumably your scheme permits you to commute your scheme pension up to a 25% lump sum .

    Under HMRC rules, people who make AVCs on top of their defined benefit pension can take their lump sum from their AVCs pot and leave their final salary pension untouched, provided it does not exceed 25 per cent of the entire pension fund.

    Will your scheme permit this?

    As far as I know, your DC pension will be separate from your DB pension - it would be possible to take a 25% tax free lump sum from this but the balance would be taxed as income in the year of receipt.

    I will do this when I retire in two year's time. I may put some of the money into another pension but because I will be taking a pension I am limited to putting £10k a year in I believe...
    The Money Purchase Annual Allowance is now reduced to £4000 a year.

    Taking a scheme pension does not trigger the MPAA, but taking any more than the PCLS from a DC pension does.

    http://www.pruadviser.co.uk/content/knowledge/technical-centre/money_purchase_annual_allowance_mpaa/

    Have you obtained a state pension statement?

    https://www.gov.uk/check-state-pension

    You might wish to check your precise situation with your scheme administrator.
    • peterfelgate
    • By peterfelgate 5th Sep 17, 5:01 PM
    • 4 Posts
    • 1 Thanks
    peterfelgate
    • #6
    • 5th Sep 17, 5:01 PM
    Tax Free Lump Sum
    • #6
    • 5th Sep 17, 5:01 PM
    To answer the questions in no particular order!
    The existing DB scheme will cease to take new members from 30th November. Inflationary rises will be applied until the pension is taken. I will retire in two year's time at the scheme normal retirement age. The AVCs are dealt with slightly separate from the main pension and scheme rules, last updated in 2016, clearly state that AVCs cannot remain invested if the main pension is taken.
    The scheme does allow 25% to be taken from the combined sum of the pension pot and the AVCs and also allows this to come entirely from the AVCs, and my aim is to take whatever I can as cash which does not result in any tax bill.
    I want however the whole DC to come out without a tax implication as the sum of the AVCs and the DC pot will be less than 25% of the total of the two pots, if this is possible.

    I note the MPAA limit, but it doesn't really affect what I wish to do.
    • xylophone
    • By xylophone 5th Sep 17, 5:42 PM
    • 23,419 Posts
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    xylophone
    • #7
    • 5th Sep 17, 5:42 PM
    • #7
    • 5th Sep 17, 5:42 PM
    I want however the whole DC to come out without a tax implication as the sum of the AVCs and the DC pot will be less than 25% of the total of the two pots, if this is possible.
    My inclination would be to say that the new DC scheme would have to be regarded as a separate pension, so that you could take up to 25% tax free with the balance taxed as income in the year of receipt.

    https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/tax-and-the-cash-lump-sum

    However, you will note that Duncan has commented in answer to your question on this point

    If the scheme allows it, then yes. If they dont then no.
    I would suggest (as in my post above) that you contact the scheme administrator to check on your personal situation.
    • peterfelgate
    • By peterfelgate 6th Sep 17, 2:43 AM
    • 4 Posts
    • 1 Thanks
    peterfelgate
    • #8
    • 6th Sep 17, 2:43 AM
    • #8
    • 6th Sep 17, 2:43 AM
    OK, so it appears that I can't combine the two pots and take 25% in whatever proportion I want from each scheme. It seems the two pensions are treated separately and the unused proportion of the 25% tax free sum from the DB scheme can't be transferred to the withdrawal of cash from the DC scheme. It isn't the flexibility I expected and with the current climate causing so many DB schemes to close this situation will be quite common for many people for many years....
    • Mutton Geoff
    • By Mutton Geoff 6th Sep 17, 10:26 AM
    • 955 Posts
    • 999 Thanks
    Mutton Geoff
    • #9
    • 6th Sep 17, 10:26 AM
    • #9
    • 6th Sep 17, 10:26 AM
    OK, so it appears that I can't combine the two pots and take 25% in whatever proportion I want from each scheme. It seems the two pensions are treated separately and the unused proportion of the 25% tax free sum from the DB scheme can't be transferred to the withdrawal of cash from the DC scheme. It isn't the flexibility I expected and with the current climate causing so many DB schemes to close this situation will be quite common for many people for many years....
    Originally posted by peterfelgate
    I am in a similar situation. I have two pensions, one already in a drawdown scheme from where I took the max 25% tax free cash on transfer and I have a final salary pension. There is still some headroom in my tax free cash (around £30k) but I can't take that out of my drawdown pot since I've already had the max %. If I draw it from my defined benefit scheme, I will lose some of that benefit in return and the sums don't stack up. The two can't be merged as far as HMRC are concerned so I will lose some of the tax free cash benefit in return for maintaining my final salary pension at it's max rate.
    Compensations/Refunds from Banks & Institutions - £4,165 | Stooz Profits - £7,636 | Quidco - £3,963

    All with a big thank you to Martin and MSE.com from Mutton Geoff!
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