Does it make sense to make any further contributions

fcandmp

Having now obtained details from my DB scheme providers, I am left wondering how best to address the projected LTLA value over the current £1.25m maximum, and or if there is scope for any further contributions to my active DC scheme, prior to opting for protection and crystallising , and hope members here might guide me further?

I am in a very fortunate position at 55, and summarise as follows:

DC scheme current valuation, £615k with employer currently contributing £1000 per month.

Four DB schemes (all deferred) projected as follows:

A) NRD 60, £7,744 (lta £154,878), reduced pension post tfc £5,651, early retirement penalty 6% per year. Plus extra £20,671 gmp at 65.

NRD 60, £14,569 (lta £291,371), reduced pension post tfc £10,428
Early retirement penalty 4.5% per year

C) NRD 60, £3,913 (lta £78,259), reduced pension post tfc £3,102, early retirement penalty 4% per year

D) NRD 62, 6,863 (lta £137,269), no tfc Or early retirement option due to GMP valuation.

These valuations appear to put me £47,499 over (£1.25m lta) with no TFC or £34,450 over having taken max tfc at NRD.

In prior years I had used part of my bonus (received in january) to supplement my DC scheme value, especially as it would otherwise attract the highest income tax.

So my question is really whether there is an optimum path through this in terms early retirement from one or more of the DB schemes to reduced income tax penalty over current lta, and or any scope to avoid higher rate tax on this year's hoped for bonus?

Many thanks

Daniel54

fcandmp wrote: »

Having now obtained details from my DB scheme providers, I am left wondering how best to address the projected LTLA value over the current £1.25m maximum

........

So my question is really whether there is an optimum path through this in terms early retirement from one or more of the DB schemes to reduced income tax penalty over current lta, and or any scope to avoid higher rate tax on this year's hoped for bonus?

A few thoughts and comments.

I assume the DB numbers at NRD are all projections using assumed rates of inflation,which should be stated in the projections.Meanwhile they are actually increasing at either RPI or more likely CPI,which is currently well below historic levels.So it is possible that a low inflation environment will naturally reduce the DB benefits to below the projections at the time you come to take them and thereby mitigate any breach of the LTA

When comparing the DB schemes,do make sure to consider any difference in benefits e.g. indexed to RPI or CPI in payment,percentage annual caps on increases , percentage widow's pension etc.

The immediate tax surcharge on crystallisation is 25% of the amount in excess of the LTA - in round terms £12.5k worst case from your OP.Bear in mind that you cannot buy a guaranteed inflation linked 5% return with that amount.

I say this because in a recent post you said your plan was to fully crystallise the DC pension in priority to the DBs.However for LTA purposes the 20x multiple undervalues the DB pensions so you should ensure these are all crystallised within the LTA .As the LTA is eroded in percentages,not amounts,it would seem sensible to leave say 5% -10% of the LTA uncrystallised in your DC until after you have taken all the DBs

Whilst it would not appear to be a problem for you,don't forget the second LTA test at age 75.

You may find some of the comments ( not just from me ) and links in this thread useful:

https://forums.moneysavingexpert.com/discussion/5328115

Regarding the bonus, you are near enough to the LTA that there is a high probability, you will end up paying 25% surcharge and a minimum of 20% on the balance as income.Even with 45% tax relief that is a pretty marginal tax gain.You might feel this worth doing if you earmark a portion of your DC pension down generations to grandchildren who could be nil rate tax payers at the time of your passing -hopefully many years hence.

In practice it would probably make more sense to pay the tax,invest the money tax efficiently and not further complicate the LTA issue.

Hope this helps your thinking.

fcandmp

Daniel, thank you for your thoughts on this which are much appreciated. I will check the DB scheme projection increases as you suggest, but believe them to be CPI, but note some of the GMP components are 8.5%.

My thinking currently is as follows and any observations would be welcome.

I plan to give up paid work in Msrch, having taken the 25% tax free lump sum from the DC scheme, which with other savings will keep us going until DB schemes kick in at NRD. I would also make the most of nil rate and 20% marginal rate tax to drawdown up to higher rate tax band before NRD.

The question remains as to whether it is beneficial to take early retirement from any of the DB schemes before NRD to reduce LTA tax exposure? My thinking was that this could also keep me below higher rate tax threshold for longer, allowing me to access further drawdowns from DC at lower marginal rate? Thks

PensionTech

I hope you are aware already, but you will need to apply for Individual and/or Fixed Protection in order to avoid being hit by the reduction in the LTA from £1.25m to £1m next April. Neither is actually available for application before April, but if you plan to apply for Fixed Protection when it does become available, you will have to have left all your schemes (i.e. permanently stopping all contributions by you or your employer) before 6 April.

In terms of your projections - I wouldn't be so sure that future inflation has been factored in. In all of the (dozens of) schemes I've worked on, only one projected inflation. The rest all used revaluation to date only, in order to display any figures in real money terms - so the amounts going into payment were always higher or (at worst) equal to the amounts quoted.

PensionTech

And having said that: from the early retirement reductions you're talking about, I'd be almost certain that future inflation hasn't been projected, as 4-5% reduction per year is pretty normal for non-projected figures. I would expect to see more like 6-8% reduction per year if the figures at NRD included future inflation assumptions.

Daniel54

fcandmp wrote: »

I plan to give up paid work in Msrch, having taken the 25% tax free lump sum from the DC scheme, which with other savings will keep us going until DB schemes kick in at NRD. I would also make the most of nil rate and 20% marginal rate tax to drawdown up to higher rate tax band before NRD.

The question remains as to whether it is beneficial to take early retirement from any of the DB schemes before NRD to reduce LTA tax exposure? My thinking was that this could also keep me below higher rate tax threshold for longer, allowing me to access further drawdowns from DC at lower marginal rate? Thks

Firstly,I have checked my own paperwork and it is just as Pension Tech suggests ie the numbers provided by the DB pension providers were present value.I did have projections with assumptions,but these were prepared by my IFA

Secondly,you can only take the full 25% PCLS from your DC scheme if you crystallise the entire pot,thereby taking up 49.2% of your LTA.In effect,you are making the decision that your DB pensions will take any LTA strain and you will have to try to fit them into the remaining 50.8% of your allowance.Bear in mind that you cannot partially crystallise a DB scheme and the only way to precisely control how much of the LTA is eventually used is by having some of the DC left over for this purpose ( crystallisation percentages provided to HMRC are calculated to two decimal points)

It may indeed make sense in terms of your total pension planning to take one or more of the DB pensions before their normal NRD,but beyond that you would need more detailed personalised advice than is likely to be available on this forum.

Using some of your bonus to pay for independent qualified advice would seem sensible,bearing in mind the complexity of having 4 DB schemes and being so adjacent to the lifetime allowance,It seems to me that you are in a situation where less than optimal decisions could prove to be very expensive.

gadgetmind

Daniel54 wrote: »

Using some of your bonus to pay for independent qualified advice would seem sensible

This is one of those few scenarios where I'd agree 100%, and I'm usually Mr. "Hey, it's easy, do it yourself!".

fcandmp

Pension tech, many thanks and will make doubly sure re the inflation aspects of the projections provided. I am also waiting eagerly for the new protection details as had been suggested I make use of the current LTA to crystallise the DC funds (actually two funds, one of £212k and the other £373k), the smaller currently active.

My employer has already referred me to an IFA as they wont currently allow me to leave the scheme without independent guidance, and I know this has to be put in train to be sorted before April'16.

Daniel54, thanks also for the thoughts re partially crystallising the DC scheme(s), I had not previously considered this as a mechanism for balancing the DB scheme LTA values. As I am currently unable to drawdown from either Dc schemes, I was planning to move them both to the same multi-access drawdown facility and fully crystallise. If I was planning to only partially crystallise the DC funds, would it be better to keep them in separate drawdown accounts? What are the implications of the uncrystalised part of the DC funds, e.g would I still be able to access 25% tax free when the residual was crystallised? Also, is there a time limit on when the residual needs to be crystallised by, am I correct in thinking that this is before I am 75?

Many thanks

Daniel54

fcandmp wrote: »

. If I was planning to only partially crystallise the DC funds, would it be better to keep them in separate drawdown accounts? What are the implications of the uncrystalised part of the DC funds, e.g would I still be able to access 25% tax free when the residual was crystallised? Also, is there a time limit on when the residual needs to be crystallised by, am I correct in thinking that this is before I am 75?

I understand most but not all providers will separately identify your crystallised and uncrystallised funds.

Each time you crystallise part of a pension,you can take 25% tax free

In practical terms,all pensions should to be fully crystallised by the age 75 and the second LTA test.

Finally,in your position ( and leaving aside LTA consideration for the moment) you might also consider taking some income as a UFPLS ( also known as phased drawdown).The main advantage is that the undrawn tax free allowance stays in the pension tax wrapper and therefore grows tax free and also stays outside of your estate for IHT purposes ( until age 75)
https://www.accountancylive.com/drawdown-or-ufpls-which-best-new-pension-freedoms

Apologies if you have already considered and discarded this option

jamesd

While normally it's sensible to crystallise DC pots as soon as possible, managing the LTA is one case where it can make sense to do things in stages. This is because you can arrange to crystallise some during a stock market downturn. I gave some worked examples in the topic LTA Protection and recommend that you read them.

Most providers of pensions aimed at individuals keep different pots for crystallised and uncrystallised pots.

There is no point in using UFPLS for phased drawdown unless there is a charge difference with your particular pension provider. If you want to do phased drawdown the flexi-access drawdown option lets you better balance the taxable and untaxed income portions to meet your income tax target, instead of having to use the fixed 75%:25% split of UFPLS.

You might also consider using VCT investing to manage your income tax liability. The initial tax relief is 30% capped at your total income tax bill for the tax year of purchase. VCTs vary in risk levels but at least one - Albion - offers a lending-based VCT with close to 100% secured lending and an anticipated income level of 10% tax free in two 5% chunks per year.

jamesd

fcandmp wrote: »

My employer has already referred me to an IFA as they wont currently allow me to leave the scheme without independent guidance, and I know this has to be put in train to be sorted before April'16.

Don't use an IFA suggested by your employer. Your employer is probably a far bigger customer than you, either directly or via referral business, and this will inevitably introduce the potential for bias. Better to have a completely independent view from an adviser that will not share any assumptions that the employer and their suggested adviser might share.

Unless you are in an an unfunded public sector scheme one of the options that your adviser should evaluate is the potential benefit to you of a transfer out of the defined benefit scheme into a personal scheme. For many schemes today the transfer values are very favourable to transfers. But not all. And where they are favourable, there is a strong incentive for the scheme not to encourage employee transfers out, with a risk that an employer-recommended adviser might share assumptions with the scheme that could make transferring out look less attractive than it might otherwise be.

Defined benefit schemes are good but if you got an attractive transfer value it could well benefit you to take the transfer.