Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@.

Search
  • FIRST POST
    • Vendee
    • By Vendee 5th Dec 17, 2:29 PM
    • 149Posts
    • 50Thanks
    Vendee
    Tax free lump sum seems too much.
    • #1
    • 5th Dec 17, 2:29 PM
    Tax free lump sum seems too much. 5th Dec 17 at 2:29 PM
    I've got a Defined Benefit and Defined Contributions pension with the same company. I've just retired and have had a list of options from the company running the schemes (Capita). The DB element will be taken as a monthly pension. Regarding the DC element, I have been given the option of taking a tax free lump sum (PCLS) which works out at 65% of the total DC fund. I was under the impression that I could only take 25% tax free.

    The only thing I can think of is that the tax free sum I have been offered represents 25% of my DB pot and DC pot combined. Is that how it works?

    Thanks.
Page 1
    • dunroving
    • By dunroving 5th Dec 17, 2:36 PM
    • 595 Posts
    • 284 Thanks
    dunroving
    • #2
    • 5th Dec 17, 2:36 PM
    • #2
    • 5th Dec 17, 2:36 PM
    I've got a Defined Benefit and Defined Contributions pension with the same company. I've just retired and have had a list of options from the company running the schemes (Capita). The DB element will be taken as a monthly pension. Regarding the DC element, I have been given the option of taking a tax free lump sum (PCLS) which works out at 65% of the total DC fund. I was under the impression that I could only take 25% tax free.

    The only thing I can think of is that the tax free sum I have been offered represents 25% of my DB pot and DC pot combined. Is that how it works?

    Thanks.
    Originally posted by Vendee
    If the DB and DC components are linked, you can take 25% of the whole scheme value as a TFLS. In many cases, this can mean being eligible to take 100% of the DC value as a TFLS.

    I think to calculate the value of your DB pension for tax purposes (not the same as transfer value), you multiple the annual pension by 20 - but someone else will be along soon to confirm whether that number is correct.
    • ermine
    • By ermine 5th Dec 17, 4:41 PM
    • 624 Posts
    • 924 Thanks
    ermine
    • #3
    • 5th Dec 17, 4:41 PM
    • #3
    • 5th Dec 17, 4:41 PM
    Regarding the DC element, I have been given the option of taking a tax free lump sum (PCLS) which works out at 65% of the total DC fund. I was under the impression that I could only take 25% tax free.

    The only thing I can think of is that the tax free sum I have been offered represents 25% of my DB pot and DC pot combined. Is that how it works?
    Originally posted by Vendee
    This is often the point of buying a parallel DC fund with a DB pension. I targeted the amount of my AVCs such that the combined amount was such that I could take the AVC fund tax free in its entirety. To compute that you multiply the annual value ofthe DB pension at NRA by 20 times, then add that to the AVC amount, as dunroving and this HMRC manual say

    Surprised you were unaware of this piece of good fortune - did you not take any interest in the pension while earning it?
    • Vendee
    • By Vendee 5th Dec 17, 6:46 PM
    • 149 Posts
    • 50 Thanks
    Vendee
    • #4
    • 5th Dec 17, 6:46 PM
    • #4
    • 5th Dec 17, 6:46 PM

    Surprised you were unaware of this piece of good fortune - did you not take any interest in the pension while earning it?
    Originally posted by ermine
    To a certain extent perhaps. I joined my company's DB scheme and after a few years, the company withdrew from it and it then converted to the DC scheme. It didn't really involve any input from me.
    • kidmugsy
    • By kidmugsy 5th Dec 17, 9:40 PM
    • 9,896 Posts
    • 6,675 Thanks
    kidmugsy
    • #5
    • 5th Dec 17, 9:40 PM
    • #5
    • 5th Dec 17, 9:40 PM
    I have been given the option of taking a tax free lump sum (PCLS) which works out at 65% of the total DC fund.
    Originally posted by Vendee
    How very agreeable. Perhaps you might like to withdraw the TFLS for some big expenditure you have in mind. Or you could draw it steadily over the years to help you fill some other tax-shelter, e.g. an ISA or a spouse's pension.

    Maybe the other 35% will supply some useful income to bridge the gap (if there is one) until your State Retirement Pension begins.

    If you are so well off that your estate might face an IHT charge, you might consider leaving capital in the DC pension.

    There are other possibilities too.

    You are spoilt for choice.
    Last edited by kidmugsy; 05-12-2017 at 9:44 PM.
    Free the dunston one next time too.
    • Vendee
    • By Vendee 5th Dec 17, 10:06 PM
    • 149 Posts
    • 50 Thanks
    Vendee
    • #6
    • 5th Dec 17, 10:06 PM
    • #6
    • 5th Dec 17, 10:06 PM
    How very agreeable. Perhaps you might like to withdraw the TFLS for some big expenditure you have in mind. Or you could draw it steadily over the years to help you fill some other tax-shelter, e.g. an ISA or a spouse's pension.

    Maybe the other 35% will supply some useful income to bridge the gap (if there is one) until your State Retirement Pension begins.

    If you are so well off that your estate might face an IHT charge, you might consider leaving capital in the DC pension.

    There are other possibilities too.

    You are spoilt for choice.
    Originally posted by kidmugsy
    Thanks for your help.

    I was actually planning on using the 65% tax free lump sum (along with the DB pension) to bridge the gap to my state pension kicking in. Its not a huge sum in the scheme of things and it will have to last about 6 years. I am in receipt of a modest military pension already. The remaining 35% of my pot I was planning to combine with another small DC pension I have and leave that untouched for a rainy day. Having said that, I was wondering if it would be worth taking the 25% tax free part of my second DC pot and sticking it in an ISA?
    • kidmugsy
    • By kidmugsy 5th Dec 17, 10:17 PM
    • 9,896 Posts
    • 6,675 Thanks
    kidmugsy
    • #7
    • 5th Dec 17, 10:17 PM
    • #7
    • 5th Dec 17, 10:17 PM
    I was actually planning on using the 65% tax free lump sum (along with the DB pension) to bridge the gap to my state pension kicking in.
    Originally posted by Vendee
    Seems fair enough. One question: is your income going to be above the personal allowance against income tax in future tax years? (For this purpose you ignore the TFLS.) If not it could be worth drawing some of the taxable part of that pension to use up the otherwise unused PA.

    The remaining 35% of my pot I was planning to combine with another small DC pension I have and leave that untouched for a rainy day. Having said that, I was wondering if it would be worth taking the 25% tax free part of my second DC pot and sticking it in an ISA?
    Originally posted by Vendee
    That's tempting. Governments keep making pensions less attractive while leaving ISAs untouched. Your proposed action would defend you from any more of the same. Another wheeze would be to contribute up to £3600 gross (£2880 net) to a pension in future tax years - perhaps your other small DC - because that beats putting the money into an ISA by about 6%. On the other hand if the basic rate of income tax goes up in future then that advantage might vanish, or even be reversed.

    In the present tax year you could presumably contribute much more than £3600, since you have earnings. But then you'd need to check the "anti-recycling" rules that limit the amount of TFLS you can recycle into new pension contributions.
    Last edited by kidmugsy; 05-12-2017 at 10:24 PM.
    Free the dunston one next time too.
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

5,038Posts Today

4,232Users online

Martin's Twitter
  • Have a lovely weekend folks. Don't do anything (fiscally) that I wouldn't do!

  • RT @thismorning: With his last deals of the year, @MartinSLewis wishes us all a 'very merry Christmas, a happy Hanukkah and a wonderful and?

  • RT @stoneygran: @MartinSLewis I furtively used a pub toilet last night before getting on the bus and felt really guilty!

  • Follow Martin