Defined Benefit Pension Advice please

Frank1962

Thanks Deneb. I, Like many people of this country who are poorly educated when it comes to investing and pensions have only started looking into this now at 56, to try and understand the retirement landscape ahead of me. Only to realise, it would have been wiser to do this earlier!

At the moment I have transferred old poorly performing pensions into the SIPP. And I am trying to work out if it would be financially better to transfer the full DB pension into it.

As you mention in your comment, that comes with risk. My wife has no experience of private investment. And I am reading everything under the sun to understand it better as newcomer to private investment. My son seems to undertand it very well for a 25 year old, and should the need arise he would be able to guide her along with some professional help. But it is a well made point. My wife is risk averse. Whereas I am not.

Many thanks

Deneb

Frank1962 wrote: »

I'm putting any spare money into an ISA now invested in funds, as this is tax free. Rather than putting any of my spare money into the SIPP, as an alternative to contributing any more into her pension.

So you're putting money that has already been taxed into an ISA, where it will be tax free on the way out. If you were to put it into a SIPP, you would get tax relief at your marginal rate on the way in, and be able to take 25% tax free on the way out. Depending on your other income after retirement, you may be able to take even more out tax free as well, up to the amount of your personal tax allowance. So an ISA is not the most efficient option, unless you need to withdraw the money before you are 55.

Regarding your open question. I had also considered drawing the DB pension now and using the lump sum to put into an ISA in joint names. But I am not certain if I have to 'officially' retire to do this. Can you still draw the DB private Pension and carry on working full time? Does any one here know the answer to this?

Yes, provided you're above the minimum scheme age to start drawing the pension, although you will be paying additional tax on your pension income that may not arise if you take it after you have retired. Taking the lump sum from a DB pension may not be the most efficient option either.

Frank1962

Thanks Daneb. I thought you had to pay tax on your annuities. What circumstances would you not pay taxes on them?

May I ask the reason you think not taking the lump sum to use as investment money, may not be the most efficient option? (Genuine question, I am trying to learn and understand people's rationale and the information here is very useful)

Many thanks

Deneb

Frank1962 wrote: »

Thanks Daneb. I thought you had to pay tax on your annuities. What circumstances would you not pay taxes on them?

An annuity is only one of several ways to take a pension. If you are in receipt of a final salary pension you are not taking an annuity, which involves handing over a sum of money to an annuity provider who will agree to pay you a regular defined income for an agreed period of time, usually until death and perhaps to a surviving partner thereafter.

But aside from that, pension income is subject to the same tax limits as employment income, with the proviso that when you commence a pension, you can if you wish take up to 25% of it (or a notional amount in the case of a DB pension) tax free.

You also have your personal tax allowance, £11,850 for 2018-19, plus any other tax allowances you might be entitled to. The first £11,850 of your income in the current tax year would therefore be untaxed, and any other income above that amount taxed at your notional rate, i.e 20%, 40% etc.

If your income in retirement is less than your personal tax allowance, it will not be subject to income tax at all. If you start taking a pension income whilst still working, and your employment income is greater than your personal tax allowance, your entire pension will be taxed at your marginal rate.

May I ask the reason you think not taking the lump sum to use as investment money, may not be the most efficient option? (Genuine question, I am trying to learn and understand people's rationale and the information here is very useful)

Many thanks

Lump sums taken from DB pensions are calculated on the basis that you give up a certain amount of annual pension income in exchange for a one off tax free lump sum, i.e. you commute part of your pension entitlement. The amount of lump sum that you receive for every pound of income that you give up is referred to as the commutation rate.

Commutation rates for DB pensions are often, although not always, fairly poor value. 12:1 is not uncommon, meaning that you are offered a tax fee sum of £12 for every £1 of annual income that you give up. If you are healthy with no reason to suspect that you have a poor chance of surviving a normal lifespan, the only winner out of that arrangement is the pension scheme. You are likely to receive substantially more in the form of regular income over your future lifespan, on average, than you would by taking the lump sum, unless of course you have an urgent and justifiable need for the money. A commutation rate of around 20:1 is probably at a point where you might want to consider which side of the fence you'd like to fall!

Deneb

Frank, just realised on re-reading your question as to whether you can take your DB pension whilst still working, that there is an ambiguity in the question and my reply.

Whilst there is nothing to stop you receiving a DB pension from the minimum scheme age, and continuing to work thereafter, you would have to "retire" from your current employment if the pension is linked to that employer, and possibly seek work elsewhere.

It is possible to go back to work for the NHS after retiring and taking an NHS pension, as my wife is in that position. But, if you earn over a certain amount, a proportion of your pension may be abated (withheld) and you will also not be allowed to rejoin the NHS pension scheme.

Frank1962

Thank you Deneb and everyone who has replied. Some useful information here that I will digest and use to review my situation.

Terron

You seem to be worried about your wife's status should you die early./


You also seem to be confusing how DB pensions work with how DC pensions like your SIPP work.
A DB pension is not a lump sum. It is a promise to pay you a certain amount per year. SUch promises are expensive to keep so companies like to buy them selves out of them. At a rate advatageous to them. It may also be advatageous to youin certain circumstances, such as if you are at a high risk of dying early.



The DB pension is likely index linked and it sounds like there is provision for a spouse's pension. That may seem small but the index linking would make it good insurance against your living a long time, and slightly less good insurace against your wife living a long time.


My feeling as a non-professional is that you should probably keep the DB pension along with your NHS pension/ Neither is very large but together they will give reasonable protection against living a long time/



Life insurance could cover the risk of your dying early

Frank1962

Thank you Terron.

kidmugsy

Frank1962 wrote: »

There will be a reduction in the NHS pension if I retire early and that would lose approximately 5k for each year of early retirement.

That can't be right. If you lost £5k a year pension that implies that your NHS pension would be somewhere about £100k a year.

How big is your NHS annual pension forecast to be?

Frank1962 wrote: »

I had also considered drawing the DB pension now and using the lump sum to put into an ISA in joint names. But I am not certain if I have to 'officially' retire to do this. Can you still draw the DB private Pension and carry on working full time? Does any one here know the answer to this?

(i) There's no such thing as an ISA in joint names. The "I" stands for 'individual'. You can open an ordinary investment account in joint names. It might be called a "dealing account" or a "shares and funds account" or something like that. It would be up to you to manage it to ensure that you paid no income tax on the dividends and no capital gains tax on share sales. If the amount of money in the account were to be modest that tax avoidance would be easily done. For example you are each allowed £2k a year in dividend income without having any income tax to pay on it.

(ii) In general there's nothing stopping you drawing your non-NHS DB pension early and then using the extra income to fund some extra pension for you or your wife. You'd want to know what the "actuarial reduction" will be for drawing it early. As a rough rule, if it were reduced by only 3% for each year early that would be good value. 5% is more likely but you simply have to enquire.

Frank1962

Hi Kidmugsy. Thanks for your reply.

The 5k a year I mentioned represent the contributions per year that are made to my pension. Have I misunderstood how this works? If I pay less in, I expect to get less out right?
At age 67 the forecast of the NHS pension is approx 120k. I've checked the NHS early retirement information and If I retired 5 years early I would lose approximately 21% of the value of the pension (I have a combination of 2008/2015 pension)

Unfortunately I don't have the in depth knowledge or expertise displayed by the people who have replied (for which I am grateful). I am trying to learn and understand as much as I can before I have a meeting with an advisor. As there seems to be so many options, I want to be a little prepared and have some idea of what will work best for me.

I know the pensions I have are not very large. So I am looking at increasing the amount I will have by trying to invest wisely too as a supplement to any pension I would receive. I would gratefully welcome any suggestions by any experts or anyone that has found themselves in a similar position.

I was not aware you could not have an ISA in joint names, so thank you for your suggestion of a dealing account.

Question - are there any tax advantages to having a dealing account with all the immediate family names on it?

Many thanks