Defined Benefit Scheme NRA 60 but intend to work until 65?

DaveAB_2

I have an old defined benefit scheme with an NRA of 60 but I intend to work until at least 65.
I am 60 in December 2015.
My state pension age is now 66.
I am in full time employment and making the minimum contribution to me current employer's defined contribution scheme (we have a big mortgage).
I also have a small private pension from when I was self employed, and contracted out of SERPS, some years ago - this also originally had a NRA of 60 but I asked for it to be put back to 65.
The old defined benefit scheme will not allow me to adjust my NRA to 65.
What are my most tax efficient options - NB I am in the 40% tax bracket.
Could I take up to 25% of the old DBS at age 60 tax free and then, ether directly or indirectly, use the monthly pension (presumably it will be taxed at 40%?) but reinvest the pension as AVCs in my current employer's DCS thereby benefitting from tax relief and addition employer contributions?

xylophone

Do you have to take the 25% tax free lump sum or can you choose a larger pension?

If you then took the larger pension, contribute as much as possible to your current pension (avoiding any lump sum recycling considerations)?
https://forums.moneysavingexpert.com/discussion/5266457

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

Or if you took the lump sum, could you reduce your mortgage by that amount, enabling you to increase your pension contributions?

DaveAB_2

Xylophone many thanks for you informative response.
I take it from your reply that I could potentially just take the DBS pension from December 2015 (presumably paying 40% tax at source), but then increase my current employee DCS by the equivalent amount allowing for 40% tax relief?

greenglide

Does your present scheme allow salary sacrifice for AVCs? If so there is a saving to be made on NI contributions as well albeit not very much if you earn over the upper earning limit of £42,385 (2% as opposed to 12% ).

DaveAB_2

Greenglide,
Many thanks - I am pretty sure that it does.

DaveAB_2

I have read some of the info on "money recycling" and it does not sound to me as though, even if I take a lump sum, that HMRC could consider it "money recycling" as I would just be paying the equivalent of the DBS monthly income draw down as an AVC into my employer's DCS. So there is absolutely no plan to use the lump sum to fund additional pension scheme contributions.

jamesd

The key ages are 55, at which point you can take pension money from money purchase pensions, and 60 as the NRA for the defined benefit scheme.

The defined benefit scheme is quite likely to be one that does not increase the amount paid if you don't take it on time, so it's unsurprising that the trustees would refuse to allow delay. The lump sum amount depends on the pension scheme. What do the rules of this one say about the lump sum? It's usually a very bad idea to take a non-mandatory lump sum from a defined benefit pension because the cost in lost income for each Pound of lump sum is usually bad. Lump sum / income gets you the commutation rate. Civil Service and many public sector schemes are a poor 12:1, break-even is perhaps 28:1. In general lump sums save employers money and make pensioners worse off.

Ask your employer about options to take lump sum or income from or transfer the pot of the work defined contribution pension. Is it salary sacrifice?

The reason income or lump sum from the work pot is of interest is that a person who is 55 or older can pay into a pension then take the money out almost immediately. After doing this once their pension money purchase annual allowance will be reduced from £40k to £10k a year, and they can continue paying in and taking out £10k a year until age 75 or until earned income drops below £10k.

The general approach would be to pay in £8k net that is grossed up to £10k in a private pension or £10k gross from a gross deduction at work or salary sacrifice. Then take out the £10k. 25% of the amount taken would be tax free and the remaining 75% taxable as normal income. If all of the pension contribution was within the higher rate band the tax gain for this would be 40% of the £2500 tax free lump sum, £1,000 a year. That's an extra thousand a year from pre-planing and using pension contributions that you can use to help with the mortgage. One of the rules is that recycling lump sums up to £7500 a year is OK so this regular contributing and taking can't be considered to be banned recycling because the 25% of £10k is £2.5k, under £7.5k.

That assumes that you have no significant savings. If you have any it would be better to use them to subsidise living costs and pay into pensions for as much 40% tax relief as you can get, then take the pension money only when you're close to running out of savings. In this case you have to watch out for the lump sum recycling rule because the money from savings could be treated as just a dodge to allow recycling the lump sum before you took it.

Starting your DB pension at age 60 in December this year explains an increase in pension contributions up to the total income from that pension each year - it's extra income you don't need, so might as well make pension contributions instead of paying tax on it.

Knowing your pension contribution history for the last five years and the amount currently in the work DC pension would be useful. So would knowing the guaranteed or optional values of the lump sum from the DB scheme.

The pot size and work DB pot size are of interest because one of the recycling rules allows up to 30% of the total lump sums taken as the increase in pension contributions over the two tax years before taking the lump sums, the tax year taken and the two following tax years.

Five years of history lets us see the three years before the five year period starts to establish a baseline for pension contributions. Then the most recent two years, the current and the next to can be used to ensure that you stay within the 30%, allowing for the expected increase from the DB income.

jamesd

Salary sacrifice makes the pension contributions/take the money combination more beneficial, particularly if some of the saved employer NI is added to the pension contribution. Ensure that the combination of theirs and yours stays below the £10k MPAA once/if you trigger that limit. Taking just tax free lump sums doesn't trigger it, taking any of the additional 75% does. Taking DB income doesn't matter to it.

xylophone

I take it from your reply that I could potentially just take the DBS pension from December 2015 (presumably paying 40% tax at source), but then increase my current employee DCS by the equivalent amount allowing for 40% tax relief?

I think you could do this - I like the idea of taking larger pension rather than lump sum because it will be inflation linked, enabling you to increase the pension contributions while you have earned income and recover the 40% tax ?

kidmugsy

"Key points to remember.
a. The rules were not devised to trap the unwary. HMRC states that ‘very few lump sum payments will be affected’.
b. For a tax penalty to apply,the recycling must be ‘pre- planned’. In HMRC’s words this means ‘a conscious decision’ to take the tax-free cash and use it, directly or indirectly, to pay significantly increased contributions. The onus is on HMRC to prove a pre-planned intention to recycle.
c. HMRC states clearly that the recycling rule isn’t aimed at individuals who just pay significantly increased contributions, whether personally or through an employer or via salary/ bonus/redundancy sacrifice arrangements, with the aim of increasing the amount of benefit they can receive including tax-free cash – but not because of the tax-free cash."

From
http://www.scottishwidows.co.uk/Extranet/Literature/Doc/FP0289

DaveAB_2

Many thanks for everyone's assistance - all much appreciated as this is a bit of a "mine field" to the uninitiated like me!

The DBS document, which I received a few days ago, has given me 2 basic options:

1) An annual pension of: £12,023.37 (19.23% of LTA)
2) A tax free lump sum of £58,709.83 plus an annual pension of: £8,806.41 (18.78% of LTA)

Obviously, I could vary the amount taken as a tax free lump sum and increase/decrease the pension.

I have been contributing roughly £175 a month gross to the current employers's DCS.
I think my employer contributes likewise.
This has been the case for the last 4 years although I have been contributing slightly smaller amounts to this DCS for about the previous 4/5 years - roughly 8/9 years in total.

My private pension, from previous self employment, is roughly £60,000 with about 50% protected rights.