When should he take his DB pension?

DairyQueen

Thanks all for the valuable pointers and philosophical reality check.

Would love to start spending but I'm up against it with an OH who likes working, plus both of us have a lifetime savings habit. It's such a profound change in outlook that there should be a 'how to start spending it' manual.

Neither of us resent paying our fair share of tax. We have both paid HRT and, in OH's case, pretty much throughout his career. He has definitely coughed-up his share over the last four decades. He is looking forward to reducing his contribution to the national coffers in retirement, and who can blame him?

As he has LTA protection he can no longer contribute to a pension. I (on the other hand) have plenty of flexibility to continue pension payments so 100% of my income could be paid into my SIPP.

I have reduced longevity so we are neck-and-neck in the final race. If I outlive him I won't need anything like £50k p.a. in income. I would be comfy on £25k net. £30k and I would be a merry widow. I'm sure that he would still be able to indulge his more expensive tastes on £35-£40kp.a. The DB/widows and SPs will easily cover our requirements on the first death. I am hoping that there will be sufficient left in the SIPPs/DCs to provide contingency for later life care and/or inheritance. Anything left for adult kids (his) and nephews (mine) isn't a priority as they will have benefited throughout our lifetimes.

The commutation rates on his DB are x17 at age 62 and x15 at age 65 but I believe that the widows' pension will be reduced proportionately if he takes any TFC.

Our instinct is to maximise the guaranteed, inflation-linked income so defer taking his DB until age 65, and then drawdown from the DC/SIPPs for non-discretionary and flexible spends up to the max BRT in retirement. I also think we should access a chunk of TFC from his DC/SIPPs now so we can at least enjoy some decent holidays before he retires. He is also due to replace his car and we will need cash to meet the cost of moving in 2/3 years.

We will also need to bridge the income gap from when he retires until SPs kick-in so will drawdown from the DCs/ SIPPs between his ages 65 and 68.

As my guaranteed income is only the SP I will be able to drawdown more from SIPPs/DC than him at basic rate tax after we retire.

Seems best for him to drawdown from his DC/SIPPs up to max BRT whilst he is still working as he will have a chunk of unused BRT allowance to use-up. Excess funds could then be invested in S&S ISAs to provide non-taxable income in later retirement.

I also omitted one of his pensions from my OP. He has an old Section 32 with GMP. The GMP is much more valuable than the policy and will provide an extra £3k per year, but no inflation-proofing. This may be payable at age 63 (the policy NRA) rather than the usual age 65 (Harris v Aviva Ombudsman decision refers).

Am I making sense? Please feel free to challenge my logic.

Thanks again for helping. Without this forum I would be at a loss to know where to begin on many of these issues.

Terry_Towelling

I'm rubbish at this sort of stuff and I won't challenge your logic because I don't know - but I'll stick my oar in anyway, for what it's worth.

I don't think you have a first world problem. I think you have as simple choice between being extremely comfortable in retirement and being really, extremely comfortable. I'm not going to be your first 'forum gainsayer' but I will question whether forgoing luxuries and not upsizing property are really sacrifices. I've done both of those things too but mainly because I couldn't afford them - or to boost my pension - but that's probably because I have no skills and didn't work my socks off when I was able to work:)

Your principle issue is, on the face of it, trying to reduce the tax bill that may be incurred either in your lifetimes or when your heirs inherit. I understand the desire to reduce tax but don't think it is going to make that much difference in the long run to your standard of living. If you have a large tax bill it means you have a large income.

Your idea to draw from DC scheme up to BRT limit seems sound but going forward, all these pensions will have to be taken at some point and paying more tax is going to be unavoidable. Every day that passes is one day less to enjoy the benefits of all that saving, so stop worrying about tax and start trying to enjoy what you can do with the money. I accept there are restrictions on that for you at the moment but you really need to ensure that the self-imposed 'deprivation' made in the cause of a bigger pension were worth it.

Perhaps your biggest problem is going to be getting your OH to retire. He has successfully deflected the issue for another 3 years but who knows how he will feel about it then.

DairyQueen

Terry_Towelling wrote: »

Perhaps your biggest problem is going to be getting your OH to retire. He has successfully deflected the issue for another 3 years but who knows how he will feel about it then.

Thanks for your response.
Well spotted. This is the number one problem. Number two is convincing a workaholic accountant with a savings habit that tax isn't an issue.

I have a plan to reveal the benefits of retirement beginning with some nice holidays.

Upsizing now is also a possibility but it would mean mortgaging the new home as we would need to retain the second property in order that he can commute during the week (ironic hey?). It would also mean extra stamp duty and CGT but worth it IMO.

Just to clarify. Am I right in thinking that when he takes his DB (crystallises) it will be valued at x20 for LTA purposes? This value will then form X% of his LTA. The valuation of his SIPPs/DCs must then be under the remaining LTA X% at each crystallisation event in order to avoid 55% tax on the value above the LTA?

I think I'll take a look at rightmove.

Triumph13

DairyQueen wrote: »

Just to clarify. Am I right in thinking that when he takes his DB (crystallises) it will be valued at x20 for LTA purposes? This value will then form X% of his LTA. The valuation of his SIPPs/DCs must then be under the remaining LTA X% at each crystallisation event in order to avoid 55% tax on the value above the LTA?

Spot on regarding how things are assessed for LTA, but the 55% only applies if you take the excess as a lump sum. If you put it into drawdown then you have an LTA charge of 25% followed by normal income tax when you withdraw it - so if you can get it out at basic rate that's a net 40% or 55% if you pay HRT on the withdrawal.

DairyQueen

Thanks for the clarification Triumph. That makes sense.

Back to the spreadsheets.

AnotherJoe

Can he pay you very well? ISTR theres a limit before HMRC think are are taking the proverbial, but paying you as much as possible within those limits so it can be put into your pension would seem to be a good strategy?

Dotty13

Have you thought about both going to see an Independent Financial Adviser? this type of scenario is their bread and butter business and they will provide you with a clearer picture of various scenarios, so you will be able to make an informed decision regarding when best to retire. The first meeting should be free. Make sure the Adviser has the relevant qualifications to discuss DB schemes, as not all do.

DairyQueen

AnotherJoe wrote: »

Can he pay you very well? ISTR theres a limit before HMRC think are are taking the proverbial, but paying you as much as possible within those limits so it can be put into your pension would seem to be a good strategy?

We've decided not to raise any red flags at HMRC. Could I be paid VERY well.... errr... yep. Will I? Nope. We've decided a single share class is the best (safest?) way to go and divis will be split 50/50. We are happy to settle for the tax advantages available outside the strait-jacket of PAYE. I will be paid a nominal amount for the work that I do, probably directly via (employer) pension contribution to avoid eating into my tax free allowance. Himself will receive the usual tax-efficient, nominal salary. Most of the profits will be distributed via divis post corporation tax. Even with divi tax on top we will be better off.

OH is an accountant and (as he keeps telling me) there is a definite line between tax avoidance (legal) and tax evasion (illegal). We are happy to contribute our fair share to the national coffers but I figure that OH has paid enough tax in his lifetime to support a few families (other than his own). If he can legitimately reduce his tax take leading-up to retirement then fair 'nuff.

DairyQueen

Dotty13 wrote: »

Have you thought about both going to see an Independent Financial Adviser? this type of scenario is their bread and butter business and they will provide you with a clearer picture of various scenarios, so you will be able to make an informed decision regarding when best to retire. The first meeting should be free. Make sure the Adviser has the relevant qualifications to discuss DB schemes, as not all do.

We have taken advice from IFAs on specific issues in the past and are not averse to doing so now. However, how we take income from various sources (limited company and pensions) is quite convoluted because of OH's decision to move to self-employment. We will probably refer our plan to an IFA for a sensibility check before actioning it.

kidmugsy

DairyQueen wrote: »

The commutation rates on his DB are x17 at age 62 and x15 at age 65 but I believe that the widows' pension will be reduced proportionately if he takes any TFC.

It's worth checking that assumption. In my principal DB scheme I took max commutation and yet my widow's pension lost not a penny.

You could also check whether his DB scheme happens to offer "Allocation" whereby he'd give up a bit of annual pension so that you'd get a bigger widow's pension. But if you're not confident of surviving him maybe it's a rotten idea.