Impact on drawing from SIPP on DB contributions

saucer

Hi all
My wife is in a DB scheme (LGPS) and intends to retire in 9 years at 61. We are thinking of opening a SIPP that I understand she could access from age 55 (in 3 years).

Can someone please clarify whether, if she was to take 25% tax free lump sum from this, this will affect her ability to contribute to the LGPS? Also if one takes the 25% tax free, does that preclude adding to the SIPP further?

I understand that there is a rule reducing the annual allowance for contributions to DC for people already drawing some pension. Thank you for your help in our complicated retirement planning schemes!

mgdavid

No, and no.
To amplify the second point the SIPP provider will keep the crystallised and uncrystallised portions separate.

jamesd

No effect on the defined benefit pensions, or on defined contribution, if all that is taken is the 25% tax free lump sum.

If any taxable money is taken from DB via UFPLS or flexible drawdown the allowance for DC is reduced from £40k to £10k with reduction to £4k expected. DB not affected. A workaround is to use the small pots rule which allows taking all of the money from a DC scheme, capped at £10k, from up to three schemes per lifetime.

Taking income from a DB scheme has no effect on the limit.

saucer

jamesd wrote: »

No effect on the defined benefit pensions, or on defined contribution, if all that is taken is the 25% tax free lump sum.
.

So to be totally clear, if she has e.g. 40K in a SIPP at 55, she can take it out in annual parts such that any lump is 25% tax free, and the remainder taxable at her marginal rate? Moreover this will have no effect on current or future options to invest salary in the DB scheme? From what I can see this would be how it would work using UFPLS to deplete the SIPP over a few years.
Thanks again for the advice

jamesd

That's correct but it would be unwise for her to take any taxable money except using the small pot rule.

The reason is that it would cost her a lot of money in lost income tax relief on defined contribution pension contributions by getting her the £10k or £4k cap. While working and 55 or older she can pay in up to her pay, or, if it is lower, £40k minus the increase in value of her DB pension during the year. And she can promptly take out 25% as a tax free lump sum.

If you can afford to the optimal strategy is maximum possible amount after allowing for DB cost into DC each year, since the more she pays in, the greater the amount of her pay that has 25% made free of income tax.

OldBeanz

You haven't given details of salary and what you are trying to achieve but someone of your wife's age cannot draw an unreduced LGPS pension until her SP age which will be 67. From 61-67 if she had the funds in a DC scheme she could be drawing her tax allowance + 25% tax free. With the tax allowance due to increase shortly to £12,500 that is £16,666pa without paying tax.

saucer

OldBeanz wrote: »

You haven't given details of salary and what you are trying to achieve but someone of your wife's age cannot draw an unreduced LGPS pension until her SP age which will be 67. From 61-67 if she had the funds in a DC scheme she could be drawing her tax allowance + 25% tax free. With the tax allowance due to increase shortly to £12,500 that is £16,666pa without paying tax.

She is on about 28k and this is likely to go up a bit. We also have a BtL for which she is the the sole beneficiary, adding around 5k to her taxable income. I am a HRT payer, also in a DB scheme (NHS) payable at 60 and 67, and am close to using up all my allowances re pensions. We are in a fortunate position but having prioritised pensions over mortgage, we are now having to save hard to pay off the mortgage, which is interest only (0.75pa) and due for repayment in 6 years.

It sounds like it might be better to continue to do this in ISAs rather than through SIPPs, so as to leave the flexibility to use the SIPPs as you have suggested later on.

jamesd

Preferred option for the mortgage is pension tax free lump sums because those in effect give tax relief on the capital repayments money. But how big is the mortgage vs potential lump sums? Are you close to the lifetime allowance or only the annual allowance? Knowing how your own normal pension age and tax free work lump sum compares to end of mortgage would also be useful, as would knowing mortgage amount and property value to consider possible short term equity release then repayment to get the tax advantage.

Partly I'm wondering whether a strategy of pay down mortgage with tax free lump sums then replace any unpaid amount with another mortgage to allow continued tax free lump sum usage is viable. Part of the motivation for wondering is that LGPS allows 100% of AVC money up to 25% of combined AVC and main pension to be taken as a tax free lump sum when taking the main pension. That's hugely tax efficient, relief on the way in and no tax on the way out.

Perhaps worth asking your mortgage lender about extending the term but at your rate I expect them to be very reluctant, preferring to force you to change to a cheaper for them deal.

saucer

Thanks James, there is some food for research and thought there.

The mortgage is 135k on a house worth about 550k. I can't get at my DB lump sum until 60 which is in 11 years, but it should be quite big, c. 70k. My wife LGPS lump sum is likely to be a lot smaller c.17K. She has a forecast that seems to imply that she could get a lump sum as large as 80K if she takes a reduction in annual pension in favour of a 12/1 computation.

I seem to be getting to the point where I am at risk of exceeding the lifetime allowance in the future, but it is difficult to be sure because of the uncertainty over future earnings...there is good reason to believe I am now at my peak earnings.

Overall we are behind with savings having about 28k in a couple of ISA's and children heading towards university age, so expecting to have to support them. I also have 15K in a SIPP in my name.

I am sure we will be fine in the long-term but I had been thinking that I will need to either remortgage soon or reduce pension contributions, in order to be able to have more access to cash now, both to support the kids and save for the mortgage. It is just difficult to give up the HRT relief that would be lost. Any further thought would be very welcome.

jamesd

You can reduce your potential lifetime allowance bill by taking benefits from your DC pensions each year. Just take the 25% tax free lump sum and leave the remaining 75% untouched in a drawdown account. LTA use is calculated as a percentage of the then-current LTA at the time you do this crystalising of benefits. Since investments tend to grow over time on average doing it sooner reduces the likely liability.

You can fine tune your LTA risk near the last moment by either taking the pension earlier with actuarial reduction or by commuting. Either will reduce the value for LTA purposes.

You could use your ongoing tax free lump sums for mortgage repaying or just add them to your pension or other savings funding.

Your mortgage LTV implies that short term equity release to cover even the whole mortgage balance would be easy, while your LTA risk implies that you would have ample income to get a normal mortgage for a while instead. You might then plan to repay that mostly after both of your state pensions are in payment since that's the time in retirement when financial pressure will become lowest.

The 12:1 public sector commutation rates are a bad deal unless life expectancy is poor. Better to take the higher income and use much of it to pay off a mortgage. Taking your own LTA obligation is an exception where the LTA charge reduction can make it worth doing.

saucer

That's really helpful thanks.
I may need to go on another forum for this but do you think we will have a problem getting another, albeit short term, mortgage if we leave it close to the date our current interest only mortgage is due to be repaid
? If not, then that is probably the way to go. Thanks again