A little of everything

Linton

I dont want to add to your headache but....

If your DC scheme is linked to your DB scheme do you have the option of taking the tax free lump sum you could get from the DB pension from the DC scheme? That could be ideal as it would give you maximum DB income whilst taking out a large tax free lump sum.

Triumph13

Bother. That is indeed another addition to the headache.

My previous plans had always included taking the TFLS from the DC but based on the combined number. Presumably if I transfer out the DC part leaving the DB in deferment then I no longer have that option and so my TFLS would be on the DC portion only. Thanks Linton, I would have missed that.

Am I right that the solution is to leave a DC amount to 1/3 the value of the DB in the scheme when I take the rest out?

Linton

Whether you can take the DB lump sum from the DC pension depends on the scheme rules. Often when this has been raised by other people it has been found impossible, but you might be lucky.

I think you need to talk this through with your pension administrators as I believe the lump sum entitlement will depend on the scheme rules.

Triumph13

The scheme rules definitely allow it in my case thanks

Triumph13

Having crunched some numbers I have reached the following conclusions:
1. I am extremely grateful to Linton and Kidmugsy for their insights which have completely changed my plans
2. Given that I've got letters after my name to say I'm supposed to be good at doing sums with money, how on earth are normal people expected to cope with these levels of complexity? (I suspect the answer to that one is 'that's what IFAs are for!')

The approach where the numbers are looking most sensible seems to be:
Crystallise about £500k of DC at 58, draw down at max capped rate and make up difference from target income from the TFLS, leaving about £300k deferred
At 63 when DB matures crystallise another £100k or so, largely as another TFLS leveraging the DB value. Reduce withdrawal rate to a (hopefully) sustainable 3% and slowly run down the new lump sum.
Stick the other £200k in a separate uncrystallised SIP until 75. If I die before then the Mrs gets it tax free, if not then crsytallise it and buy a small annuity to get me into flexible drawdown on the balance.
Of course all the rules will have changed by then and I'll probably only be able to access my money on alternate Thursdays, and only if the form is completed in Welsh, but I'll cross that bridge when I come to it.
Many thanks to all.

kidmugsy

Triumph13 wrote: »

I'll probably only be able to access my money on alternate Thursdays, and only if the form is completed in Welsh, but I'll cross that bridge when I come to it.

Severn, presumably?

jamesd

The Mrs always gets it tax free, whether it's in drawdown or not, provided she's willing to have it in a pension pot of her own. The 55% tax charge only applies to payments outside a pension pot and then only if you've crystallised that pot.

Just how short of the £20k for flexible drawdown are you once work pension and state pension are in payment to you?

Keeping a pension pot uncrystallised is one way to deal with inheritance tax. There is another one: giving the income away while you're alive. This way you get to pay children money into their savings pots so you can enjoy what they do with it, like buying their homes, while you're alive.

I'm not keen on spending TFLS money if it can instead be invested inside S&S ISAs for each of you. I'd want to crystallise enough to contribute the maximum to the S&S ISAs each year to get ongoing tax free income that you can give away if you like.

What is your expected pension lifetime allowance situation?

kidmugsy

jamesd wrote: »

The Mrs always gets it tax free, whether it's in drawdown or not, provided she's willing to have it in a pension pot of her own.

But there's a great difference between a widow getting a lump of untaxed money from an uncrystallised pension, and getting a crystallised pension pot where her withdrawals/annuity will be subject to income tax.

Triumph13

Lots of uncertainties, but if I mange to keep the job until 58 then my projections with 2% real return show £850k in the DC at current prices to go with a DB of £10k at 63. If the lib dems get their way and bring the lifetime allowance to £1M then I'll be in trouble. If it stays at £1.25M and doesn't index then probably still tight.
Add the state pension and I'd probably only need another £3k or so of annuity to get into flexible drawdown. My wife will already be there if I predecease her with her own £10k ish of public sector pension (I have that great luxury of modern times, the low paid wife) plus state plus 50% widow's. The 'bonus' if I die before 75 is she saves about £40k of tax on getting the cash out of the pension to make up for the extra £35k of lump sum I spend on deferring my DB to 63. Hopefully she'd be in a position to hand most of that to the kids and live the requisite 7 years more.
Basically I'm trying to target £3.5k per month post tax in retirement (which is what we live on now now that the mortgage is paid off) with fairly conservative investment return assumptions. Any upside above that we will give more to the kids from income. If we do worse then we live on less.

I too don't like the idea of spending the TFLS, but the only other options seem to be to take DB pensions early and suffer the commutations (which I don't want to do in case one of us does live to a ripe age) or to really cut back on spending early on (which I don't want to do with a significant probability of an early death anyway - too many places to visit and kayaks to buy!)