Tax Free Lump Sum: per-pension, or per-pensioner

securityguy

Suppose I have a defined benefits pension, and a completely unrelated defined contributions pension.

The defined benefits pensions offers benefits that I cannot possibly replicate elsewhere, so taking the offered tax-free lump sum offers poor value.

Conversely, buying an annuity or otherwise investing the defined contributions scheme offers poor value compared to, say, buying a house.

Do you have to take your tax-free lump sum entitlement as 25% of each pension pot, or can you take it over the whole combined pension savings? I would like to take as much as possible of the DC pot as tax free lump sum, while not touching the DB pot other than to draw the maximum annual pension from it.

Linton

In general each pension is treated completely separately so you cant take the 25% for your total pension pot from only one pension. There is one exception - with some but not all DB schemes you can take the DB 25% from an associated AVC.

jamesd

It's not even per-pension, it's for each part of the pension pot that you choose to take. So you could take benefits from £40k of a £100k pension. This could have a 25% tax free lump sum of £10,000, £30,000 in a crystallised pot (from which lump sum has been taken) and £60,000 in an uncrystallised pot.

You might do this if you wanted just £10,000 lump sum because once you take a lump sum you can't take another one, even if you took less than 25% initially. So you take 25% from whatever part of the whole pot it takes to get you the lump sum you want.

securityguy

OK, thanks: I suspected that would be the case.

Interesting the "some DB plus AVC" exception, though: I'll investigate that as I do have some amount of AVC with the DB pension.

dunroving

securityguy wrote: »

OK, thanks: I suspected that would be the case.

Interesting the "some DB plus AVC" exception, though: I'll investigate that as I do have some amount of AVC with the DB pension.

I just posted in a separate thread about how I am doing this. Depending on your age, you may want to focus on putting into the AVC defined contribution pot from here on, if you want to maximize your TFLS via AVCs and commute your TFLS from the defined benefit scheme into additional pension.


You say you have AVC "with the DB pension" - do you mean you are buying added years via AVCs? Or is it a money-purchase scheme that is linked to the DB scheme (that's what we have - a professional final salary scheme, and then a separate money purchase scheme with Prudential, that can be linked with the final salary pot for calculating the overall 25% TFLS)


Might be a hare-brained idea, but could you look into whether your AVC scheme allows transfers-in? If so, you could try to transfer in the pot you have in this other (the "unrelated") scheme.