Who polices the 25% tax free pension lump sum

tigerspill

dunstonh wrote: »

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


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

OK - So my employer runs an AVC scheme as well as the normal main DB scheme which I have looked at briefly. When you say linked - Might this be a scenario where the main DB and AVC DC parts are linked? Obviously I would need to check with them.

I haven't decided between AVCs and SIPP. AVCs have the advantage of being easy for me and are salary sacrifice so have an NI as well as a tax benefit, but there is a very small (4) choice of funds - hence I am also looking at SIPPs. Or maybe a combination of both.

On your final point - is the 25% tax saving thing only applicable to DC pensions?

I am not trying to diddle anything here and I want everything to be totally above board. I am just starting to do more serious planning here and learning a lot as I go.

tigerspill

drumtochty wrote: »

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.

Thanks for this. So from what I think you have said, there are two things need to happen here to allow you take the 25% lump sum from your company pension(s)
1. That your main and AVC parts of your pension are linked and treated as a single pension from the 25% tax free thing.
2. That your company pension allowed you to transfer the 33K (or whatever amount needed) from an external pension (e.g. a SIPP) into your company scheme.

Have I got this right?

tigerspill

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.

I don't want to touch/reduce my DB pension.

I am trying to understand how to best structure some cash that I have. I started by just think of putting it in an investment account, then started thinking of AVCs/SIPs because of the Tax advantages.

I can put a significant amount (maybe £100K) into additional pension over the next 3/4 years (most of my earnings that I am paying HR tax on). I can do £30K this FY so that is my priority as there are only three months left. I can't do all that through Salary Sacrifice. But I do have the option to make a one off non-sacrifice AVC payment.

jem16

tigerspill wrote: »

OK - So my employer runs an AVC scheme as well as the normal main DB scheme which I have looked at briefly. When you say linked - Might this be a scenario where the main DB and AVC DC parts are linked? Obviously I would need to check with them.

In some DB schemes you are allowed to use the AVC pot to fund the tax-free lump sums. However they are not that common so you would need to check your own scheme.

On your final point - is the 25% tax saving thing only applicable to DC pensions?

No you are allowed 25% tax free from a DB scheme as well. However this is usually done by commuting part of the DB pension so depends on the commutation rate as to whether this is a good idea or not. Some DB schemes include an automatic lump sum although this is not usually the full 25%.

drumtochty

Thanks for this. So from what I think you have said, there are two things need to happen here to allow you take the 25% lump sum from your company pension(s)

1. That your main and AVC parts of your pension are linked and treated as a single pension from the 25% tax free thing.

The DB scheme and company AVC's are not automatically linked, your employer has to agree to treat them as one combined pots as my previous employer did and it was their idea, not all employers will do that.


2. That your company pension allowed you to transfer the 33K (or whatever amount needed) from an external pension (e.g. a SIPP) into your company scheme.

One other thing that pension provider outwith your employer has to agree you are retiring rather than just moving the money otherwise they could make a market reduction. So the transfer in my case from Equitable Life had to happen a few days after I left my employer and in the end the combined lump sum took six to seven weeks to get into my bank account.

Again your employer has to agreed to do that.

Have I got this right?

Yes but you must get the answers in writing all along the way.

tigerspill

drumtochty wrote: »

Thanks for this. So from what I think you have said, there are two things need to happen here to allow you take the 25% lump sum from your company pension(s)

1. That your main and AVC parts of your pension are linked and treated as a single pension from the 25% tax free thing.

The DB scheme and company AVC's are not automatically linked, your employer has to agree to treat them as one combined pots as my previous employer did and it was their idea, not all employers will do that.


2. That your company pension allowed you to transfer the 33K (or whatever amount needed) from an external pension (e.g. a SIPP) into your company scheme.

One other thing that pension provider outwith your employer has to agree you are retiring rather than just moving the money otherwise they could make a market reduction. So the transfer in my case from Equitable Life had to happen a few days after I left my employer and in the end the combined lump sum took six to seven weeks to get into my bank account.

Again your employer has to agreed to do that.

Have I got this right?

Yes but you must get the answers in writing all along the way.

Thanks for this.

So being more specific, does anyone know how the BT Pension Scheme works regarding allowing the AVC lump sum to be taken as the tax free part?
i.e. does the BT scheme link the two parts (DB (lump sum and regular income) and AVCs) together as regards calculating the 25%? And does that scheme allow taking all the AVCs as a tax free lump sum assuming it is under 25%?

Just reading the AVC documentation it says
"25% of your overall BTPS benefits, including AVCs, may be taken as a tax-free lump sum (capped at 25% of the Lifetime Allowance)."
What it is not clear on is whether I can take 100% of the AVC lump sum (as long as it is under the 25% of LTA limit and therefore not have to commute any of my ongoing income.

For me, if this was the case, then this would seem a big advantage for AVCs over a SIPP.

I appreciate that I can ask our pension people, but not sure they will fully understand what I am asking.

jem16

tigerspill wrote: »

Just reading the AVC documentation it says
"25% of your overall BTPS benefits, including AVCs, may be taken as a tax-free lump sum (capped at 25% of the Lifetime Allowance)."
What it is not clear on is whether I can take 100% of the AVC lump sum (as long as it is under the 25% of LTA limit and therefore not have to commute any of my ongoing income.

That sounds like you can use the AVC pot to fund the lump sum.

What BT scheme are you a member of? Some may have an automatic lump sum which you cannot inversely commute.

tigerspill

jem16 wrote: »

That sounds like you can use the AVC pot to fund the lump sum.

What BT scheme are you a member of? Some may have an automatic lump sum which you cannot inversely commute.

Thanks jem16.
I am in "Section C" of the BTPS. I have opted in to the SMART option - though I am not sure what this means - something to do with NI.

This is the DB scheme that was originally based on a yearly accumulation of 1/60 of Final Salary and no lump sum.
In 2009 this changed to 1/80 of Career Average (from April 2009) plus a lump sum accumulating at 3/80 per year. The wording of the AVC documentation suggests AVCs are still "part" of the BTPS but are separate from the DB part.
So I don't know if I can also take the main DB lump sum as part of the 25% tax fee.

This pension stuff id way more complicated that I had thought. Really glad I am looking at it now even though it is late in the day (not easy to go back in time).

Thanks for your continued help and patience.

jem16

tigerspill wrote: »

Thanks jem16.
I am in "Section C" of the BTPS. I have opted in to the SMART option - though I am not sure what this means - something to do with NI.

SMART pension is another word for Salary Sacrifice so you gain the NI savings as well as the tax relief.

So I don't know if I can also take the main DB lump sum as part of the 25% tax fee.

It would certainly be included as part of the 25% tax-free. However it might be a better deal if you didn't have to take it from the main DB scheme as it could mean a higher index-linked pension if you can take all of it from the AVC pot.


I can't see a specific answer to that on the BT website though.

tigerspill

jem16 wrote: »

It would certainly be included as part of the 25% tax-free. However it might be a better deal if you didn't have to take it from the main DB scheme as it could mean a higher index-linked pension if you can take all of it from the AVC pot.

I can't see a specific answer to that on the BT website though.

Reading more of me AVC documentation seems to suggest that the 25% is calculated on my whole pension and that you can take the 25% from the AVC pot and leave the rest untouched.

How do my AVC funds buy benefits at retirement?
There are various ways in which you will be able to use your AVC fund to buy extra retirement benefits when your BTPS benefits become payable. For example, it may be possible to take some, or all, of your AVC fund as a tax-free cash lump sum depending on your individual circumstances. HMRC allows you to take 25% of the capital value of your total BTPS benefits, including AVCs, as a tax free cash sum, capped at 25% of the standard Lifetime Allowance.
Any funds that are not taken as a tax-free lump sum will be applied by the Trustee to purchase an annuity for you, and/or your spouse or civil partner, from an insurance company on the open market i.e. from any insurance company, not necessarily the one your funds are invested with.