About to take a DB pension...

dannynolan

I have FP 16 protection but am £40k or so over the £1,250,000 limit. I am a deferred pensioner and don't want to transfer out.

1. Is there anything I could do before crystallising the pension to reduce the 55% hit on anything over the £1.25k.

2. Is there any benefit in NOT crystallising the pension now?

3. I don't particularly need a large cash sum at present, do people have views generally on how much if any of the 25% tax-free lump-sum to take? Commutation is about 19X

4. I have seen a suggestion that I could take the additional amount over the £1,250,000 and allocate it to my partner as a dependant pension.

Thanks

Drp8713

Cant you just commute a lump sum big enough to get you under the protected LTA?

The lump sum is calculated at face value for LTA purposes whereas the pension is valued at 20x.

Silvertabby

4. I have seen a suggestion that I could take the additional amount over the £1,250,000 and allocate it to my partner as a dependant pension.

Only as part of a divorce settlement.

Drp is right - if you don't want to pay tax on the excess, then your only option would be to take a tax free lump sum/reduced pension. The figures you are looking for would be 1 x lump sum plus 20 x reduced pension. If that sum comes out as under the LTA then job done.

A commutation rate of 1:19 isn't too bad - it's certainly a lot better than the 1:12 offered by the public sector pension schemes.

dannynolan

Silvertabby wrote: »

Only as part of a divorce settlement.

Drp is right - if you don't want to pay tax on the excess, then your only option would be to take a tax free lump sum/reduced pension. The figures you are looking for would be 1 x lump sum plus 20 x reduced pension. If that sum comes out as under the LTA then job done.

A commutation rate of 1:19 isn't too bad - it's certainly a lot better than the 1:12 offered by the public sector pension schemes.

I'm confused... my early retirement statement has given me four options.

£62,500 pa with excess LTA taxed at 55% if taken as lump sum and 25% if taken as income (then HMRC's 40%)

£46,875 pa + £312,500 lump sum and excess LTA taxed at 55% if taken as lump sum and 25% if taken as income (then HMRC's 40%)

So even if I draw down the max £312,500 I will still be subject to tax on the excess over the LTA.

GunJack

Both of those two sums (using 20x pension) come to £1,250,000 exactly....where's the excess come into it, or am I missing something?? e.g. is it due a cost of living rise? is it a DB or DC pension?

dannynolan

GunJack wrote: »

Both of those two sums (using 20x pension) come to £1,250,000 exactly....where's the excess come into it, or am I missing something?? e.g. is it due a cost of living rise? is it a DB or DC pension?

It's a DB pension, yes there is an excess of about £40,000 over the £1,250,000. And this is the bit that wil lbe taxed at 55% if taken as a lump sum or as income. (the income being hit by an initial 25% then a 40% marginal rate = 55%)

kidmugsy

Does your scheme allow you to do an "Allocation" whereby you give up a bit of pension so that your widow will eventually get a bigger one than she would otherwise receive? Worth checking: a good solution if available.

Silvertabby

£62,500 pa with excess LTA taxed at 55% if taken as lump sum and 25% if taken as income (then HMRC's 40%)

£62,500 (pension only) x 20 = £1,250,00 plus the excess (£40K ?) being taxed as.....

£46,875 pa + £312,500 lump sum and excess LTA taxed at 55% if taken as lump sum and 25% if taken as income (then HMRC's 40%)

Ditto as my above - pension and lump sum has been limited to LTA, with other options for excess. Depending on the calculation factors for 1:19, the residual will be less than £40K due to the element of pension being given up.

ADD

Just goes to prove my point re how generous 1:19 is. £1.25m in the LGPS (1:12) would result in 25% tax free cash of £267,857.16 and a reduced pension of £40,178.57.

So, 20 x pension plus 1 x lump sum =

£803,571.40 + £267,857.16 = £1,071,428.50 = £178,571.50 pension benefits given up.

GunJack

Think if it was me I'd just take the excess as a lump sum, pay the tax and be done with it....with £320-ish k and almost £49k p.a. don't think I'd be worried about a one-off £20-oddk tax bill

The_Doc

My understanding is as follows:

Your deferred pension is £64500. This gives you a value of £1,290,000 to be compared to the LTA (20*64500=1290000). That leaves an excess of £40 over the LTA. If you take it all as income, then the LTA charge would be 25%*£40K = £10K.

To pay this, it is possible to get the DB scheme to pay it via commutation. So a charge of £10K gives a pension reduction of £10K/19 = £526.32

So your annual pension would then be £64500-526.32 = £63,973.68 with the scheme paying the charge.

Happier_Me

Don't you need to consider your income needs in retirement in all this too? What is your number - the amount you need to live on each year? Converting some of your pension will give you a 25% tax free lump sum whereas taking it all as an annual pension means paying tax on the extra pension effectively at 40%?

Apologies if I'm missing the obvious!