Acutuary reduction or not ?

madeinireland_2

Guys

I've had the view and seen it agreed with on this forum quite a few times that it's not usually a good idea to take an actuary reduction.

...but

What if by not taking an actuary reduction you would spill over into the 40% tax bracket ?

Would that change the view ?

Views appreciated.

Thanks

atush

Possibly but you dont give enough detail.

Another option would be to commute the DB pension to get the highest available TFLS which would reduce the income, and another would be to put some of the pension into new DC contributions.

marlot

When I work mine out,dropping from the 40% tax bracket makes it worth taking the pension 5 years earlier. The combination of 5 more years of payment, and less tax makes it neutral after tax.

I have a few years left to go, but will also be looking at commutation, another thing which is touted around as a 'bad thing', but which might work for me

jamesd

The tax can change the result but there are a few things to consider:

1. Government plan to increase threshold for 40%.
2. The drop in income is usually still disproportionate to the gain. To cut taxable income a lump sum is likely to be more efficient since you can take that and reinvest in tax free things like ISAs.
3. Learn about VCTs that are asset-backed and forget about it, just buy enough to eliminate the tax, either the 40% or all income tax, as you desire.

The best actual answer depends on the specifics like how much the actuarial reduction is, what the lump sum commutation rate is and the cost of borrowing.

madeinireland_2

Well I'm not at the stage of knowing the precise numbers yet but I think I'm currently just short of the higher rate limit.

I have worked out (with a few assumptions of course) that my pension would go up by £1260 by delaying a year. This changes to £1008 after 20% tax.

It costs me about £30k per year in living expenses and as I would not be working during my years of deferment that would have to come from savings - so it would take me some 30 years to be in credit as a result of deferring - so I'm beginning to wonder if it's worth it.

I already will have the max lump sum possible as a result of a linked AVC fund.

The sums seem to change to about 40 years if it were taxed at 40% - so seems to get beyond considering at that point.

In my last year of deferment the reduction in pension is 5.8%

Have I missed something ?

atush

So just whack a little into a DC pension. Then use the 25% TFLS when you want to and leave the rest to be inherited?

agarnett

My view is that the world needs an actuary reduction, or at least a reprogramming of existing actuaries to align them with a much stricter moral code of ethics!

Far too many for my liking appear to be employed in finding novel ways to get away with signing off fraud and misrepresentation on a regular basis.

We have got quite used to casting glances askance at big accountancy practices, who in turn have for the past few decades been more and more prone to turning a blind eye to all kinds of massive black holes in pension and other liabilities before signing off accounts. I suggest that we may be looking at the wrong profession.

Actuaries manipulate statistics and specifically probabilities for the purpose of providing the props to support the preferred strategic initiatives of their masters.

The actuarial reduction the OP is talking about may or may not be generous - it simply depends on who ordered it as part of their preferred strategic initiative on managing pension scheme liabilities within the organisation in question! However, the actual question looks to be one of the choice between the better of two evils - the soft bite of a known actuarial reduction or the taxman's less predictable predatory bite!

madeinireland_2

Atush - I'm not 100% sure on this but I expect to take fixed protection sometime before April next year assuming it's offered.

If that is the case then I believe I would be banned from making any further pension contributions - otherwise your suggestion is exactly what I would do.

Daniel54

I took the view that I wanted to maximise the DB pension in retirement -and 60% of something is better than 100% of nothing.

If you will be a higher rate tax payer,tax free capital and/or income drawdown from ISAs becomes very attractive .

marlot

madeinireland wrote: »

Atush - I'm not 100% sure on this but I expect to take fixed protection sometime before April next year assuming it's offered..

I'm hoping for individual protection, which lets me continue to pay in. Then by either taking the pension early or commuting to a TFLS, keeping below my IP limit.

madeinireland_2

Unfortunately individual protection is not an option if your pension does not exceed £1m by April next year and mine won't.

At least that is how I understand it.