Final salary scheme lump sum?

clogger

I have a deferred final salary pension which I am thinking I will take at 55, am I correct in thinking that the lump sum taken when claiming early retirement from a final salary scheme is tax free, on the point of making a big decision but not wishing to face an unexpected tax bill down the line.
Looking to continue as a sole trader making a small income buying and selling on the internet to supplement what will be my small monthly pension, so will be sending a tax return as a sole trader, I realise my monthly pension would come into this calculation but my understanding is that the lump sum I plan to take will not affect the tax position, am I right about that?
My feelings have always been to take the maximum monthly pension, but in the back of my mind I wonder about the sustainability of the particular final salary scheme I am in, despite winning recent awards as being the best run such scheme in Europe there are also reports of a huge black hole in the schemes figures, making me think it might well be preferable to have a lump sum actually in my bank account, despite it not being a particularly attractive commutation rate. Any thoughts on this would be appreciated, and yes i do realise the best and most financially sensible thing to do is wait till I am 65 before thinking about claiming it , but unfortunately that's not going to be an option.

mgdavid

all 25% PCLSs are currently tax-free.

Loughton_Monkey

The lump sum is certainly tax free.

Most FS schemes do indeed give you the option of taking the pension at any time over age 55, rather than at the "Normal Retirement Date" set out in the scheme rules.

What you get at normal retirement date is pretty much 'contractual'. It is guaranteed [subject only, usually, to what future RPI turns out to be].

However, whenever anyone asks for early retirement, then an Actuary must put pen to paper, make some assumptions, and come to some sort of conclusion about that individual's 'share'. A sort of current day estimate of future 'rights'.

Now I cannot speak for your particular scheme, or any of the particular actuaries involved, but do not be surprised to find that the 'assumptions' they make will tend to be 'conservative'. On who's side I leave you to guess.

I also had a FS scheme due in 2009. I retired early in 2006, but having planned this from 2001 onwards, I obtained a quote [for transfer or early retirement] every year or so. Not with any intention of transferring it, but purely for my own valuation/estimating purposes. Needless to say, that the value of the fund doubled from the value quoted only 5 years prior to NRD.

atush

Are you happy knowing your pension and lump sum will be reduced by 25-50% for being taken 5-10 years early?

Not generally considered to b ea wise thing to do unless you are desperate for cash. And your pension once in payment does have protections via the PPF. Look into it?

You could, put excess income into a new DC pension instead if you take the higher pension. This will provide a TFLS for you later.

clogger

atush wrote: »

Are you happy knowing your pension and lump sum will be reduced by 25-50% for being taken 5-10 years early?

Wouldn't say happy exactly, but understand why there is a big price to pay for early payment.


Not generally considered to be a wise thing to do unless you are desperate for cash. And your pension once in payment does have protections via the PPF. Look into it?

Yes accept its certainly not a wise move in pure financial terms,its useful reading up again on the PPF website, as I understand it, once the pension is in payment It would be 90% protected until reaching scheme normal retirement age when it would be 100% protected, the grey area i dont fully understand is that if something happend to the scheme whilst I am in the deferred pension position it might be possible for me to be denied access to my pension untill reaching 65, now that in pure financial terms would be great in respect of having a decent pension at 65, but I would like to eat some cake now , so to speak. The more reports I read in the Media makes me think now might just be a good time to fill in the forms I have in front of me, but I admit its one of those really big decisions to wrestle with.

You could, put excess income into a new DC pension instead if you take the higher pension. This will provide a TFLS for you later.

Even accepting the higher pension figure, there is unlikely to ever be "excess" to do other things with but i understand and appreciate the suggestions , my internet trading shall we say is more at the reliant robin end than rolls royce, but who knows, this time next year and all that..

atush

well you are more likely to have excess income with a higher pension than lower pension.

generally, the rate for commuting pension into a LS is pretty dire so poor value for money.

jamesd

As well as getting a quote for early retirement you should ask for a transfer value. The same circumstances that produce projected deficits for pensions can also produce unusually large transfer values. If you get one of those large transfer values it could easily be a better option to transfer and use income drawdown instead of starting early retirement inside the scheme.

clogger

I have the exact figures, Option 1, Full Pension £9566 pa. Option 2, Residual Pension £6768 pa with LS £45,121 or any amount from £0 to the max lump sum. Quoted at March 2015
The last Indicative Cash Equivalent Transfer Value £ 195,545 dated April 2014

jamesd

If you were to take a 25% tax free lump sum and not use it for anything the 4% guideline for long term inflation-linked income from drawdown would pay £5866 a year. In your case it appears to be better to stay in the existing pension unless you have significant adverse health issues.

clogger

its been announced today, companies intention to close final salary scheme to further accrual. the implications of which will I am sure become clearer as time goes on.

atush

It wont affect you as much as current employees as you are deferred.

As you are still working, so you really need to take this pension early/reduced?