Drawdown vs Savings

[Deleted User]

Apologies if this has been asked before, but I couldn't find the answer ....

My salary is £36500, I am 57, and thinking to retire early.

I contribute to a DB scheme which normally pays out at age 60 although I can take it now with a 6% reduction.

I also contribute to a DC AVC through my employer that has £8000 at the moment.

My intention is to retire this year, take the 6% hit on my current pension and use the DC pension as a drawdown to help fund the next 2.5 years when a second DB pension that was deferred kicks in.

My question is this - my salary plus current DC funds will take me somewhere near the Higher Tax bracket if I was to withdraw the funds completely (the scheme I am in doesn't offer drawdown as an option).

Is there any benefit in my contributing more into the DC pension as any tax benefit I've gained will surely be lost when I withdraw the funds? - I have mixed feelings about transferring the DC funds into a SIPP as it seems easier to keep the cash in an interest bearing account and managing my own drawdown without incurring any charges. I'm therefore thinking about stopping further DC contributions from the new Tax Year and putting them in savings instead - does this make sense or am I missing something? The way I see it is that I'll be paying Basic Rate Tax on the savings instead of potentially Higher Rate Tax if I leave it in the DC pension and withdraw all the funds when I retire.

Thanks in advance for comments and suggestions ...

zagfles

Are the DB and DC scheme linked? In some schemes the DB and DC are linked so you can take the entire DC tax free as part of the tax free lump sum assuming it's less than 6.66 times the annual pension.

But if not, you'll get 25% of it tax free so will only pay tax on £6k currently - when are you going to retire, unless it's right at the end of the tax year you won't have earned £36500 will you? And even then you could probably delay taking the AVC till the new tax year couldn't you?

atush

Is there any benefit in my contributing more into the DC pension as any tax benefit I've gained will surely be lost when I withdraw the funds?

No it surely wont be. You will gain more in TR that you will lose if you pay BR tax. If you pay HR tax now, you will gain even more.

That is, if you are sensitive and dont withdraw all of your funds at once in one tax year.

Is there any benefit in my contributing more into the DC pension as any tax benefit I've gained will surely be lost when I withdraw the funds?

Yes, there is the huge uplift to your pension of tax relief. Where else can you put in 80 quid day 1 and have it turn into 100 guaranteed? Or better yet, if you pay HRTax, you get 100 when you only put in 60.

OldBeanz

It would help if you know whether the DC pension is linked to the DB or the name of the scheme.
As your retiral age is 60 then two of the popular schemes are the LGPS or the Classic CSPS. Both are government schemes, in the LGPS the two are linked - to the benefit of the employee and with the Classic CSPS the two are not linked but the funds can be moved to another scheme easily.

marlot

Sleazy wrote: »

...

I contribute to a DB scheme which normally pays out at age 60 although I can take it now with a 6% reduction...

That's a good scheme.

Mine reduces by 6% a year, so two years early would be a 12% reduction.

jamesd

Sleazy wrote: »

My intention is to retire this year, take the 6% hit on my current pension and use the DC pension as a drawdown to help fund the next 2.5 years when a second DB pension that was deferred kicks in.

Why not use 0% for spending credit cards to delay taking it for longer?

Sleazy wrote: »

the scheme I am in doesn't offer drawdown as an option

So transfer it to one that does. You can also just pay into any personal pension that will allow drawdown for new money you pay in.

Sleazy wrote: »

I'm therefore thinking about stopping further DC contributions from the new Tax Year and putting them in savings instead - does this make sense or am I missing something?

You get tax relief on all you pay in but 25% at least can be taken out tax free. That gain beats the interest you'd get outside the pension.

Since you won't have a salary when doing the drawing you can time taking the 75% to when it can all be taken within your personal allowance, using the credit cards to top up the income in the meantime. That means you can get the whole 25% gain from the pension tax relief out.

[Deleted User]

OldBeanz wrote: »

It would help if you know whether the DC pension is linked to the DB or the name of the scheme.

It's the Railways Pension Scheme (RPMI). There is an AVC called BRASS which is linked to the main scheme and I am already contributing the maximum to this allowed under the scheme rules. The BRASS funds have to be taken as a Tax Free lump sum.

The DC scheme is separate and is known as 'AVC Extra'. It allows for contributions above those made into the main DB scheme and BRASS.

jamesd

Good to read that you're doing maximum BRASS, good move.

Best to check about transferring out of the DC bit, that's what you need to know to help to know if it's better to pay more into that or a different personal pension.

atush

If the BRASS can be used to provide the TFLS, then I would leave it with the main pension. And start a PP or Sipp now and whack in as much as you can/ Might get you a year/18 months early retirement?

And then still have your max DB pension, and TFLS.