LTA and Minimising any Tax

andyrpsmith

Hi pension experts,

I am 62 and due to retire from the NHS after 40+ years in 2019.

I moved to the 2008 scheme and my standard benefits are projected to be a max pension of £49,668 + Lump Sum of £91,616 which would give a LTA of £1,084,976 ie over the likely £1m+CPI

Also I took out an AVC in the 1990's as at the time I was going to retire at 60 and would have had less than the full pension. The AVC pot sits at £26,350 making the LTA £1,111,320.

I am aware that the excess could be taxed at 55% if taken as lump sum or 25% if taken as a pension.

I have calculated the following as a possible option to minimise tax:
Commutation of £11700

Pension £37968 x 20 = £759,360

Lump Sum £232,016

Total £991,376

+AVC £26,350

LTA £1,017,726 ie just below £1M + CPI (£1,018,000)

My question is is this a sensible option? I wish to maximise my benefits from my NHS pension as the AVC is not worth much at all. I checked and I can leave the AVC untouched until 75.

I want 20 years of good retirement (plan to leave the house to the 2 children). I could draw down the lump sum at £1000 per month for just under 20 years if I need (not taking account of interest) and if I die before, my family have it and the widow's pension.

Many thanks.

kidmugsy

I'd at least consider another option, namely retiring a little earlier than currently contemplated. I'd also consider commuting a little more than you propose if you think that might make it easier to avoid higher rate income tax when your State Pension begins.

marlot

Were you over £1m on 5 April 2016? If so, you could claim protection.

Other than that, to avoid/reduce the charge you can:

• Wait for a stock market slump (on the AVC)
• Take the DB pension early at a reduced rate
• Take a larger lump sum

Edited to add another way - though its rather drastic - divorce!

peterg1965

LTA is supposed to be indexed linked to CPI from 18/19, so dependent on when you actually retire, and what CPI is in September 17, it will be above £1M, therefore slightly reducing any potential LTA tax bill.

jamesd

Commutation probably doesn't make sense because the commutation rate is poor. Paying the LTA charge may make more sense than taking that loss.

What's most likely to make sense is retiring a little earlier. That reduces the level of increase due to reduced service. You could also take an actuarial reduction by taking the pension before the normal retirement age for the scheme.

Just to be clear, AVC means a defined contribution pension part attached to the main NHS pension scheme. If this money is not in the NHS scheme it'll be a normal personal pension.

Assuming your health is OK now a person could typically expect between ten and fifteen years of retirement at 65 in good health and the remaining time until peak death age of around 92 impaired by health in some way. If your income will comfortably meet your needs and you don't work as recreation I suggest strongly considering taking some extra early years of good health retirement. Solving your LTA problem would be an incidental benefit.

If you choose to retire earlier you can make large contributions to a personal pension while working to save yourself significant amounts of income tax if you have the money or credit to fund it. Subject to whatever LTA margin you need to allow.