Closed DB scheme Pension advice.

escubados

I am 59 and two years from being fully paid up in my company final salary DB pension scheme. The scheme has just been closed to any further accrual, and a new DC scheme introduced. I can draw my pension with a small actuarial reduction at 60 and carry on working full time.
I have 38 years of contributions of which 26 years are unaffected by actuarial reduction by drawing this at 60.
I would receive approximately £1,200 a year less pension if I draw it at 60 over 65.
I would receive a pension at 60 of approximately £16,000pa along with a lump sum of approximately £50,000. My Salary is £37,000.
With a total combined income of £53,000, (salary & pension) I propose to pay £11,000 via salary sacrifice into the replacement DB scheme in order to build up a pot in the new scheme and avoid the higher 40% tax on income.
Am I correct in thinking this is allowed and does it sound sensible.
The existing deferred pension will grow at CPI with a 2.5% cap. Although still linked to final salary at leaving.

Linton

I assume its the replacement DC scheme you mean! Yes your proposal to pay enough into that scheme to avoid 40% tax is allowed and seems sensible. Also you should be able to take the money from the DC scheme to finance early retirement avoiding taking the DB pension early.

escubados

Thank you Linton.

I may need to clarify.
The DC scheme starts this month and as yet I have no accrual. I intend to contribute at a nominal rate until I am 60 at which point I plan to draw my DB pension and increase my contributions to the new DC scheme via the salary sacrifice as outlined above, whilst carrying on working full time.

kidmugsy

The actuarial reduction is so slight that I recommend you get it in writing. Also check the benefits you'd be giving up by drawing it early e.g. death in service benefit.

If it passes these tests, then I'm not surprised that you plan to draw it early. Yippee! Avoiding HRT by contributing to the DC pension by salary sacrifice is an ideal tactic. In fact, why stop at avoiding HRT? You could bung in an extra chunk to avoid (20% tax + 12% NIC) on a fair part of your income, and be better off when you eventually draw down income after you stop working. My understanding is that you could salary-sacrifice enough to reduce your pay to equal the minimum wage. Given that you will have the TFLS of £50k to live off, this would be affordable (unless, of course, you have other immediate plans for the TFLS).

escubados

Thanks Kidmugsy,

Death in Service will now be covered by an insurance policy taking effect from the start of the new DC scheme. I have had a written estimate of benefits but will ensure I can obtain an accurate figure before making any decisions.
Thanks for your reply and suggestion of further accrual which I had not considered, but will look into!

Linton

escubados wrote: »

Thank you Linton.

I may need to clarify.
The DC scheme starts this month and as yet I have no accrual. I intend to contribute at a nominal rate until I am 60 at which point I plan to draw my DB pension and increase my contributions to the new DC scheme via the salary sacrifice as outlined above, whilst carrying on working full time.

Normally one would say that taking a DB pension early is to be avoided. However your scheme seems unusually generous in only deducting about 1.3%/year for taking it early - from memory 5%/year seems more common. So if the numbers are right and also your lump sum isnt seriously reduced taking it at 60 seems pretty much a no-brainer. Do you have the option not to take the lump sum? If you do it may be worth considering.

escubados

Thanks again Lynton,

As I said 26 years of my contributions will have no actuarial reduction if I retire at 60 as the scheme prior to 2003 allowed retirement at 60 this was the scheme retirement age.
I don't think I can leave the lump in but I beleive I can have a larger lup sum and a further reduced pension, which I am not considering.

Thanks again.