About to take a DB pension...

The_Doc

One reason people may not want to take the PCLS is that they don't need the cash at that point in time. Taking the PCLS and not spending it leaves it in your estate and you end up paying IHT at 40% instead. I reckon wealth taxes are more likely to increase in the future than income taxes.

dannynolan

The_Doc wrote: »

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.

I'm still a bit confused. The excess LTA whether I take it as income or lump sum comes to me NET of 55% (lump sum) or NET of 25% if I take it as taxable income. It is not the physical paying of the tax I'm trying to avoid but the tax liability itself. I can't see that taking a lump sum/ commuting means I avoid the liability.

Or am I missing something.

The_Doc

55% lump sum is effectively the same as 25% + 75%*40%. So if you are a high rate tax payer, then its the same. If you are are basic rate tax payer, its cheaper to take it is income 25%+75%*20%=40%.

As you will be HRT, there will be no difference.

Taking a PCLS has a minor impact but I don't think you can avoid it entirely.

No PCLS, Pension LTA value = 64500*20=1290000, so 40000 liable to charge
With max PCLS, Pension LTA value = 48052.6*20+312500=1273553, so 23533 liable to charge

The above numbers are based on pension of 64500 with commutation rate of exactly 19 using the formulae below.

PCLS = min (0.25*64500*20, 64500/(3/20+1/comm rate).
Residual pension = 64500 - PCLS/comm rate

I don't see a way to avoid the liability completely. Have you included any actual reduction as you mention in post #4 that this is an early retirement?

dannynolan

Doc, thanks for your reply - apologies for not replying sooner but I was flat on my back with a chest infection.

Yes I have included a reduction for early retirement. I am pulling figures off the Pension adminstrator's quote for me.

kidmugsy

dannynolan wrote: »

£46,875 pa + £312,500 lump sum.

What a neat way to avoid a large annual 40% income tax hit - until your State Retirement Pension begins, anyway.

What would you do with the lump sum? Buy an island? I suppose you could gift it into a Discretionary Trust with a list of beneficiaries to include widow, children, grandchildren, ... Then be careful to survive seven years and, bingo!, no inheritance tax to pay on it.

kidmugsy

The_Doc wrote: »

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

Is that what is known as "scheme pays"? What is the advantage of dealing with it in that way?

The_Doc

Getting the scheme to pay allows the commutation rate to be used to convert some of the pension into a lump sum to pay the tax. If you have a good commutation rate, then this can work in your favour.

Also, if you do not have any DC funds, then getting the scheme to pay (out of pre-tax income) is much superior than paying it of out existing savings.

Or you may simply not want to crystallise your DC funds, so scheme pays is again a good option.