Company Pension & TFLS

Trumpeter

I am soon to be taking early retirement at the age of 56 from a final salary pension scheme. This is being done as part of a redundancy settlement & so will paid on full service & with have no actuarial reduction applied.

I have been given options ranging (in round figures) from a full TFLS of £127K & a residual pension of £19K p/a at one extreme to taking no lump sum & having a pension of £27K p/a. This is a commutation figure of about 15.8.

I am (I hope) in reasonably good health & have no immediate need for the total lump sum so I am thinking of foregoing part of it in return for a higher pension.

The figure I have in mind is to give up £47K leaving a TFLS of £80K & a pension of £22K p/a.

My question is, what happens to the tax free part of the lump sum? Is it lost or can it be reclaimed over the coming years until the £47K is used up? I will also have some taxable income from a SIPP which I intend to draw down & some other savings in taxable accounts so it will not take the full 15.8 years to earn an extra £47K.

I have asked the pension scheme administrators but have been told only that I can sacrifice part of the TFLS as intended but the residual pension is taxed at source & they cannot advise on tax matters.

I intend to contact HMRC soon but if in the meantime I could get a simple explanation it would be much appreciated.

Linton

Taking a lump sum and starting a DB pension is something you can only do once. You wont get a second chance to receive an extra untaxed lump sum.

xylophone

The part of the DB pension received as regular income will be taxed in the normal way - there will be no additional allowance given because you have not taken the full PCLS.

Trumpeter

xylophone wrote: »

The part of the DB pension received as regular income will be taxed in the normal way - there will be no additional allowance given because you have not taken the full PCLS.

So effectively at standard rate income tax, the £47K is the equivalent of giving up £58.75K? Giving a "payback" figure of about 19.6 years? May be time for a rethink.

xylophone

Don't forget that the pension income will increase with whatever inflation index applies to your scheme.

LXdaddy

Trumpeter wrote: »

So effectively at standard rate income tax, the £47K is the equivalent of giving up £58.75K? Giving a "payback" figure of about 19.6 years? May be time for a rethink.

Not quite a simple as that methinks...
The pension payments with a DB scheme will increase in some way generally with inflation but capped.
The lump sum can be invested and grow.


If we assume that you will pay basic rate on the whole of the pension payment, in the three options you have
a) 127K lump sum + 15.2K per year
b) 80K lump sum + 17.6K per year
c) 0K lump sum + 21.6K per year


If you invest the lump sum it will grow at some investment growth rate (G%). The annual pension will increase at some rate related to inflation (I%)


if G% is higher than I% you are better off taking the largest lump sum


if G% is less than I% then there will be a point where the accumulated pension payments will be more than the value of the lump sum. The cross over point depends on G% and I% obviously so you have to use your forecasting powers or crystal ball to try and decide.


I ran a simulation with G at 1% and I at 2% and the cross over is at around 20 years. G=1%, I=3% crosses over at 19 years.


So maybe your short answer is as accurate as my long one!

mgdavid

Just don't lose site of the odds that at 56 you are likely to live about another 30 years....

maximumgardener

why don't you take the full TFLS and invest it . Its tax free!!!

draw it down as you need to.

that way you will pay tax on £19k less your tax allowance

and a bit more when you access your SP

good luck!

Trumpeter

maximumgardener wrote: »

why don't you take the full TFLS and invest it . Its tax free!!!

draw it down as you need to.

that way you will pay tax on £19k less your tax allowance

and a bit more when you access your SP

good luck!

Thanks, I think that's looking like the way forward. All I need now is a safe investment that'll keep up with inflation.....

maximumgardener

Its a pleasure! I did something similar.
you are in good shape here. with £127 K TFLS and an additional SIPP in place as well you may find benefit in taking advice from an IFA local to you.?
with a decent investment horizon of 10 years plus, (say 5% average returns after costs) your £127K
should easily last you 10 years obviously depending how fast you draw it down.
say £10k per year for starters tax free!!!!
get in with a fund supermarket with some decent funds . get advice its worth it!!

greenglide

All I need now is a safe investment that'll keep up with inflation.....

That is called a DB pension. If you want a safe investment then the DB pension payments will provide this. Drawing excess PCLS amounts just to invest it "safely" is surely an unnecessary risk!