Who polices the 25% tax free pension lump sum

tigerspill

I am wondering about the mechanics of ensuring that we can't take more than 25% of our pension pots tax free.

So lets say I have the following -
1. DB company pension yearly income of £25,000 plus a £100,000 lump sum. Total pot value of £600,000 (yearly income x 20 plus lump sum).
2. DC SIPP of £200,000
TOTAL Pension Value is £800,000

So I could take the SIPP 200K tax free as it is 25% of the total pot.
What is to stop me actually taking the 100K from the DB scheme as well (going over the 25%).
For this to be policed, there must be somewhere HMRC would know that the total value is 800K. Do they know this through some info. from registered pension funds against NI number or something. Or does it have to be declared on SA tax returns.
Or if I take the 200K lump sum tax free one year but defer the DB payments - how would the know to tax that a few years later?

jem16

tigerspill wrote: »

I am wondering about the mechanics of ensuring that we can't take more than 25% of our pension pots tax free.

So lets say I have the following -
1. DB company pension yearly income of £25,000 plus a £100,000 lump sum. Total pot value of £600,000 (yearly income x 20 plus lump sum).
2. DC SIPP of £200,000
TOTAL Pension Value is £800,000

So I could take the SIPP 200K tax free as it is 25% of the total pot.

No you can't. They are separate pension schemes and you can take 25% from each.

What is to stop me actually taking the 100K from the DB scheme as well (going over the 25%).

Your DB scheme couldn't do this. It can only allow you to take the maximum of 25%.

For this to be policed, there must be somewhere HMRC would know that the total value is 800K. Do they know this through some info. from registered pension funds against NI number or something. Or does it have to be declared on SA tax returns.
Or if I take the 200K lump sum tax free one year but defer the DB payments - how would the know to tax that a few years later?

Each scheme is dealt with separately as far as 25% tax free lump sums are concerned so it will never happen.

Linton

Each pension is handled separately so there would be nothing wrong with taking the DB scheme lump sum and 25% from other pensions. Whether you would actually get a £25K pension with a £100k lump sum I dont know.

dunstonh

So I could take the SIPP 200K tax free as it is 25% of the total pot.

In theory yes but there are no providers that support this. Only linked schemes support it and they are not common.

1. DB company pension yearly income of £25,000 plus a £100,000 lump sum. Total pot value of £600,000 (yearly income x 20 plus lump sum).

A defined benefit scheme does not work that way other than for calculating the lifetime allowance.

System

Hi

Well the pension provider actually asks you to give details.

So if you don't...

The provider can be fined 55% of the overpayment, so they are cautious.

drumtochty

When I retired in 2010 I did that but you cannot fiddle it the way you think tigerspill.

I was in a final salary pension and that year the company allowed transfers in for that very reason.

Assume a pension of £20k a year from the final salary pension and you did not want to cash any of that in as the value of the lump sum was £12 for each £1 of income lost. It should have been £30 as the pension is still increased by RPI.

Therefore the value of the pension was as you say 20 x the annual amount as far as HMRC is concerned. So lump sum value £400k.

You are allowed to take 25% of your pension cash free and you do not want to cash in any of the £400k so the £400k is the 75% that you take as an annual pension and you then add on £133k to make your new total company pension pot of £533k.

In this case, if I had say £100k in company AVC's, I could transfer in say £33k from an outside pension pot. I infact did just this. So as in this example £400k grossed up annual pension, £100k in the companies AVC funds and a further £33k brought in from outside the company scheme.

Total pot £533k and £133k removed tax free.

Lots of companies will not let you do that so in those cases you can only take a total of 25% of each of the gross funds.

In my case I would have £500k in the company pot and would only take out £100k from the company pot, my company AVC so less than 25% of the total company pot as I did not want to loose any RPI pension.

I would only get £8,250 tax free from my pot outside the company and have to pay paye on any annuity I got from the remaining £24,750 of that £33k external pot.

So the safegurd is it is a max of 25% from each pot unless one of the pots allows transferrs in.

Good try but HMRC have already thought of that.

System

You can transfer and combine equivalent pension pots so as to maximise the PCLS, but presumably not DB schemes as they work in a different way.

For example, you can transfer a cash-rich SIPP into another that is entirely tied up in commercial property, and then strip out all the cash if it is 25% of the combined total value.

jem16

Clifford_Pope wrote: »

You can transfer and combine equivalent pension pots so as to maximise the PCLS, but presumably not DB schemes as they work in a different way.

You could transfer a DB pension out to a DC pension but in most cases that would be a very foolish thing to do.

chucknorris

jem16 wrote: »

You could transfer a DB pension out to a DC pension but in most cases that would be a very foolish thing to do.

Have you always been able to do this jem, or is it a recent change? Obviously I wouldn't do it unless the terms were favourable, and I wouldn't anticipate that they would be. But in the context of 'leaving no stone unturned', I would be interested in receiving a quotation at an appropriate time. The terms are IMO awful for taking a 25% tax free cash lump sum from the TPS, and my guess is that the transfer value to a DC scheme might be on a similar (bad value) basis, but that's just my gut feel.

jem16

chucknorris wrote: »

Have you always been able to do this jem, or is it a recent change?

You have always been able to do this.

However from April 2015 you won't be able to transfer out of the TPS into a DC scheme as transfers from unfunded Public Sector schemes will be banned.

chucknorris

jem16 wrote: »

You have always been able to do this.

However from April 2015 you won't be able to transfer out of the TPS into a DC scheme as transfers from unfunded Public Sector schemes will be banned.

Ahh well I didn't have any expectation of value anyway.