25% tax free lump sum calculation

bikeman

Recently got my DB pension statement and the tax free lump sum offered is £7k. However, I also received a current transfer value of £220k.

£7k is way off the £55k I would get if I was able to transfer out. Why might this be?

jamesd

It's whatever the scheme rules say. No general rule that DB pay 25% of any particular amount.

CETVs are currently higher than usual because of very low interest rates. But that has no effect on the DB pension numbers, just on transferring out.

kidmugsy

bikeman wrote: »

£7k is way off the £55k I would get if I was able to transfer out. Why might this be?

The profound answer is that it's because a transfer would shift all the investment risk, and the longevity risk, from the scheme to you. The rest is detail.

Silvertabby

Is this an actual retirement statement or just an annual statement? If the latter, then is it possible that the £7 quoted is just your standard lump sum, and not the maximum 25% tax free cash you could opt to take (by taking a reduced annual pension)?

This would be the case if your benefits are with the LGPS and you have both pre and post 2008 service.

Andy_L

Many DB schems calculate the lump sum by multipling the annual pension given up by a number. often this number is defined in the scheme rules and has no relationship to the value of the pension given up in exchange for the lump sum and thus different to the numbers from the CETV valuation

dunstonh

There is no 25% tax free lump sum with defined benefit schemes. It uses a calculation to give a figure that is broadly equivalent based on the defined benefits. Often with pension statements, they will give multiple examples showing different lump sum amounts taken and the impact on the income.

The transfer value is not the same thing. It is an artificial figure created on a range of assumptions as well as specifics about your pension. The transfer value will fluctuate but the defined benefits remain constant (plus indexation)

bikeman

ok thanks. From the answers I gather that maybe it is a good time to take advantage of the current high transfer rates.

GDB2222

bikeman wrote: »

ok thanks. From the answers I gather that maybe it is a good time to take advantage of the current high transfer rates.

Nooooooooooooooooooooooooooooooooooooooo!

bikeman

because?

£220k invested in buy to let would likely bring in more than the £6k pa pension

or

I could drawdown more than the pension and it would still see me out.

dunstonh

£220k invested in buy to let would likely bring in more than the £6k pa pension

it wouldnt be £220k invested in a buy to let. You would lose nearly half that amount in tax.
That ignores that the pension is likely more favourable than a buy to let in investment returns after tax.

I could drawdown more than the pension and it would still see me out.

Possibly. However, an annually increasing guaranteed income for life vs one that is subject to volatility may or may not appeal to all.

kidmugsy

bikeman wrote: »

I could drawdown more than the pension and it would still see me out.

So you invest in shares, there's a stockmarket slump, you panic and sell, and then decide never to buy shares again. Now you've got 50% of what you started with. Along comes an inflation and knocks merry hell out of the value of the cash that now fills your pension pot. Etc, etc.