Should I defer my DB pension?

Camster

I'm 58 and will be leaving my employment in the next few months due voluntary redundancy.

I have been in my employers pension scheme for over 20 years and I'm trying to work out if it would be better to take my DB pension early when I leave, or defer it until I'm 60.

The normal retirement date for the scheme is 65, but the guidance booklet I have on the scheme says that for members who joined prior to April 2002, a deferred pension is payable from age 60 without any reduction for early payment.

I was always of the view to just take it as soon as possible, but can anyone advise me on if this would be the best option in these circumstances?

kidmugsy

If you would suffer an actuarial reduction for 7 years if you took it at 58, but no reduction at 60, then the latter will be the better value. But would the retirement at 58 involve a 7 year reduction? Shouldn't you enquire, in writing?

atush

How much is your redundancy payment?

anything over 30K is taxed as income. So it would make sense to put any money over that into a DC pension. Which could be taken whenever you like- 25% tax free, and the rest as income.

the total could easily take you thru the 2 years until your DB pension pays out in full at 60?

Camster

My redundancy payment will be around £45,000.

soulsaver

Ask the scheme to supply the info on your options - you can't decide without the information.
If you take the early option you get 2 years reduced pension that wouldn't get obviously if you wait to get the full pension.
If that's £8k vs £8.1 k pa its a no brainer, take the early.
If it £4k vs £8k its also a no brainer...

While you request the numbers, also ask for a Cash Equivalent Transfer Value... Be sitting down when you get the reply.

jamesd

In general you should wait until sixty, using redundancy money, savings and investments until then. If you have the money you should ensure that you've made pension contributions up to your total pay this tax year because you can get the tax relief and as a person 55 or older take the money out quickly. It's a neat way to save yourself lots of income tax.

This post shows the sort of approach to cash flow planning that you can use to work out how much income you can take.

Camster

jamesd, I've looked at the thread you suggested and have done a bit more research on this myself.

Could you please advise me if my understanding of the situation as I have outlined below is correct?

I can receive £30,000 of my redundancy payment tax free and put the remaining £15,000 into a new personal pension, which would mean there was no tax due on this as would normally be the case.

I could also use the carry forward rule to put more into my new pension for the current tax year and the three previous tax years, and would receive tax top ups from HMRC into the pension fund at my normal tax rate of 20%.

Once this had been done, I could take a one off tax free payment from the pension of 25% of the value of the fund.

If I estimated my unused allowance of £40,000 for the current year and the previous three years as £32,000 a year, I could put in £128,000 (4 x £32,000) and would get a 20% contribution from HMRC of £25,600, giving a total pension pot of £153,600. I could then take a 25% on off tax free withdrawal of £38,400, leaving a pension pot of £115,200.

I could then use the £38,400 as living expenses until I took my pension at 60 without any reduction for taking it before my NRD of 65 for my scheme.

My current pension estimate for taking it now is around £22,500 before tax, which takes into account a 6% per year reduction for taking it early. If I defer taking it for the 18months until I turn 60, I'm giving up around £33,750 of gross pension income for this 18 month period, but this is offset by the £25,600 payment into my pension pot by HMRC, so the net cost of the deferment is really £8150. This deferment boosts my pension at 60 by around 9% for the rest of my life, as it avoids the 6% p.a. reduction for early payment.

Is my logic correct on this?

jamesd

Camster wrote: »

I can receive £30,000 of my redundancy payment tax free and put the remaining £15,000 into a new personal pension, which would mean there was no tax due on this as would normally be the case.

Correct.

Camster wrote: »

I could also use the carry forward rule to put more into my new pension for the current tax year and the three previous tax years, and would receive tax top ups from HMRC into the pension fund at my normal tax rate of 20%.

Correct but only up to your qualifying income this tax year. You can carry forward unused annual allowance but not income.

Camster wrote: »

Once this had been done, I could take a one off tax free payment from the pension of 25% of the value of the fund.

Correct. Hargreaves Lansdown say allow three weeks but if you reply to their risk questionaire quickly they expect to pay the business day after receiving it. It also takes until near the end of the month following the one in which you pay in for them to get the tax relief money from HMRC so you will have to wait before taking 25% of that part.

Camster wrote: »

If I estimated my unused allowance of £40,000 for the current year and the previous three years as £32,000 a year, I could put in £128,000 (4 x £32,000) and would get a 20% contribution from HMRC of £25,600, giving a total pension pot of £153,600. I could then take a 25% on off tax free withdrawal of £38,400, leaving a pension pot of £115,200.

Not quite right. It would be £160,000 because you add 25% to give 20% basic rate relief, but you're right about carry forward amounts and how to calculate the others. But you would need at least £128,000 of qualifying income this tax year.

Camster wrote: »

I could then use the £38,400 as living expenses until I took my pension at 60 without any reduction for taking it before my NRD of 65 for my scheme.

Correct, except for the not quite right tax relief calculation.

You can also draw on the taxable portion once you're in or past your last tax year of working. You should normally do this to at least use your income tax personal allowance.

Camster wrote: »

My current pension estimate for taking it now is around £22,500 before tax, which takes into account a 6% per year reduction for taking it early. If I defer taking it for the 18months until I turn 60, I'm giving up around £33,750 of gross pension income for this 18 month period, but this is offset by the £25,600 payment into my pension pot by HMRC, so the net cost of the deferment is really £8150. This deferment boosts my pension at 60 by around 9% for the rest of my life, as it avoids the 6% p.a. reduction for early payment.

Is my logic correct on this?

Yes, that looks good to me. Your DB lump sum will probably increase as well.

Dazed_and_confused

I can receive £30,000 of my redundancy payment tax free and put the remaining £15,000 into a new personal pension, which would mean there was no tax due on this as would normally be the case.

Why do you think no tax would be due on the £15000?

Camster

Dazed_and_confused wrote: »

I can receive £30,000 of my redundancy payment tax free and put the remaining £15,000 into a new personal pension, which would mean there was no tax due on this as would normally be the case.

Why do you think no tax would be due on the £15000?

I've been advised my an accountant and also through my own research on the internet, that the only way to avoid paying tax on redundancy payments above £30,000 is to pay the amount above this figure into a personal pension.

Dazed_and_confused

You might want to consider a new accountant.

Payments into a personal pension will entitle you to tax relief at source, for example if you made a pension contribution of £15000 you would get £3750 added to your pension fund (the pension company obtains this from HMRC) so your pension fund would contain £18750 at a cost to you of £15000.

This would have absolutely no bearing on the tax due on the £15000 received from your employer though. Depending on what other income you have in the year the £15000 is paid you the tax due on the £15000 will be anywhere from £700 upwards.

If the £15000 puts you into the higher rate tax bracket you may be due some further tax relief on the pension payment but this doesn't alter the fact that the £15000 is still taxable income.