When should he take his DB pension?

DairyQueen

Having tried (and failed) to entice my husband into retiring now, I once again need guidance from the experienced people here.

He will be moving from part-time PAYE to fee-paying consultancy (Ltd company) from next month. I will be helping him with the admin and book-keeping 1/2 days per week.

We will both receive a nominal income but most of the company profits will be distributed as dividends between us. Retaining some profits for later distribution is an option. We do not need pension income to support us until he retires but we have decisions looming re: the optimum time for him to take his DB pension.

We have a first-world problem. I know this. I would also like to say up-front that OH has spent a lifetime working his socks off and his pension situation has been gained at the cost of discretionary spending on luxuries and of upsizing property. I mention this to forestall the gainsayer forum members who think that the following has been acquired without cost!

The issue we are currently battling with is when he should take his DB pension. If he defers past NRD (next April when he is 62) it will escalate at a little under 8% p.a. but his guaranteed pension is such that he is likely to defer at the cost of incurring HRT in later life. His preference is to retire at age 65 (in approx. 3.5 years).

Husband:
DB – 25548pa at age 62. 32208 at age 65. 2/3rds widows pension. Assume no TFCLS.
DC and SIPPs – 422000
Cash & ISAs – 30000
SP - Recently discovered that 3 more years of contributions are required to max SP. This will be covered by NI on earnings or Class 3.

Me:
DC and SIPPs – 230000
Cash & ISAs – 77000
SP – max will be attained at end of this tax year.

Property x 2 = £500k (no mortgage). Plan is to sell both and buy one property of equivalent value when OH retires.

Income requirement:
Currently: £45p.a. as running two homes. We have been drawing down approx. £10k from cash reserves to meet the income/expenses deficit since OH moved to part-time PAYE but the required amount will be covered from income when OH moves to limited company status. Minimum needed is approx. £36kp.a. to cover necessaries on both homes.

In retirement: Ideally £50k p.a. (and that provides a reasonable amount of jam on the bread) but I think that £60k p.a. may be do-able whilst both of us are alive.

The million dollar question is whether he should take that DB next April (age 62) and reap the benefit of flexibility as a BRT throughout retirement. Or, should he defer and take the higher amount at age 65 but in the knowledge that, once SP kicks in, he will have precious little flexibility to drawdown from his other funds without incurring tax at 40%?

Btw… he has 2016 LTA protection and therefore he may need to access the DB before age 65 to avoid incurring tax penalties. He is fine at the moment but if the bull market continues this may be an issue.

Thanks in advance for your help.

Dox

At the risk of sounding glib, it really is up to you. Which risks do you want to take: HRT, breaching LTA, dropping dead tomorrow...?

Whichever route you go, you seem to have acquired a very healthy asset base, so the chances of 'getting it wrong' aren't as dramatic as they could be for those who have not managed to amass similar financial security.

Make sure you enjoy life while you can!

Audaxer

DairyQueen wrote: »

The million dollar question is whether he should take that DB next April (age 62) and reap the benefit of flexibility as a BRT throughout retirement. Or, should he defer and take the higher amount at age 65 but in the knowledge that, once SP kicks in, he will have precious little flexibility to drawdown from his other funds without incurring tax at 40%?

If he has the option of taking a tax free lump sum with his DB pension either at 62 or 65, would that be a way of ensuring he doesn't go into the higher rate tax band? If the DB pension lump sum has a good commutation factor it may be worth considering taking it and investing it in S&S ISAs if you haven't used your allowances?

Thrugelmir

DairyQueen wrote: »

but his guaranteed pension is such that he is likely to defer at the cost of incurring HRT in later life.

Will you be a 40% taxpayer if you are fortunate enough to outlive him. Thereby benefitting from the widows pension.

Likewise despite paying 40% tax. The pension will continue to grow and compound over time.

Why get hung up over potentially paying some tax? Far more important matters to worry about in later life such as health. If we all contributed a little more to the pot. Then perhaps we can continue to enjoy a free health system which remains the envy of many.

sandsy

Lifetime allowance is an issue for him, especially if deferring DB.
Taking DB now would reduce impact. Using UFPLS for the DC pensions might help manage high rate tax issues in due course.

Due to the LTA issue, not much point in him contributing further to DC pensions. But you could contribute your entire nominal earnings to DC and live off dividends together with his DB.

OldMusicGuy

Take his DB pensions asap and keep his DC pot for you (IIRC you are younger than him). Get spending those DB pensions while he is still alive IMO so that you both get the most out of them. In fact, get spending! I feel sad you don't seem to be enjoying the results of all this hard work, unless he's worked out a way to take it with him......

Dox

OldMusicGuy wrote: »

Take his DB pensions asap and keep his DC pot for you

OP - have you realised that if your husband takes tax free cash when he starts to draw his DB pension, that doesn't have any impact on the 2/3rds spouse's pension you would receive if he dies before you? It is only his own pension he gives up for a cash lump sum; survivors' pensions are calculated as if he had taken no tax free cash.

kidmugsy

Have you considered having different classes of shares in the company so that you can be awarded dividends at different rates?

drumtochty

kidmugsy wrote: »

Have you considered having different classes of shares in the company so that you can be awarded dividends at different rates?

[FONT=&quot]The tax man will look at someone shaping the allocation of shares that each of the directors has in their two person limited company to favour paying higher dividends to the non tax paying or non higher rate tax paying director against paying a smaller dividend to the BR or Higher rate tax paying director.[/FONT]

[FONT=&quot]Do not even think about playing this game with a two person limited company as you are just putting your heads above the parapet.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]To date you have worked the system in a tax efficient way re pensions and ISA's. Stick to paying your fair share of tax.
[/FONT]

Alexland

DQ taking the DB asap such that it uses a lower proportion of the LTA is usually the answer however 8% is a tempting escalator (despite the HRT) especially if life expectancy is likely to be long? Looking at your numbers you will be fine whatever happens so it's just a question of tax efficiency. Spreadsheet time?

Triumph13

He'll be paying some HRT in retirement whatever happens due to the need to take all growth out of the DC drawdown pot before 75. Try and have a warm fuzzy feeling about how much you are contributing to society by doing so ;o)
Tax minimisation may be less important than what makes you feel happier. It's probably more tax efficient to start the DB early, but what value do you place on having a higher level of guaranteed income?