Multiple DC & DC pots and flexi drawdown

jdl920p

Hi all, new to the forum, so hopefully this is the right place to ask. I have done a search around but haven’t quite found the answers to my questions

I’m in my early 50s and have 4 different pension pots, 3 different Defined Contributions pots totalling ~£750k and 1 Defined Benefits pot – this pays about £12,500 at age 67, so the pot is worth £250,000 according to the 20x rule (if I understand the rules correctly)

So I am close to lifetime allowance, and also close to a point when I could potentially draw funds. So questions:
• If I start taking flexible drawdown from the DC pots, can I take a 25% tax free lump sum based on the total pension pot values, or just the DC pots?
• If I start taking benefits soon, will there be a tax impact on the DB pension at aged 67?
• Is there any benefits in just leaving the funds invested given that they would likely breach the lifetime allowance assuming returns are greater than inflation?

Many thanks!!

Linton

jdl920p wrote: »

Hi all, new to the forum, so hopefully this is the right place to ask. I have done a search around but haven’t quite found the answers to my questions

I’m in my early 50s and have 4 different pension pots, 3 different Defined Contributions pots totalling ~£750k and 1 Defined Benefits pot – this pays about £12,500 at age 67, so the pot is worth £250,000 according to the 20x rule (if I understand the rules correctly)

So I am close to lifetime allowance, and also close to a point when I could potentially draw funds. So questions:
• If I start taking flexible drawdown from the DC pots, can I take a 25% tax free lump sum based on the total pension pot values, or just the DC pots?

Normally each pension is treated separately for the 25% TFLS. I understand the law may allow you to mix and match but I dont believe that any platform supports this. The only exception is with some DB schmes whereby the DB lump sum can be taken from an associated AVC.

• If I start taking benefits soon, will there be a tax impact on the DB pension at aged 67?

DC benefits beyond the tax free 25% are taxed as income as are the DB payments and State Pension.

• Is there any benefits in just leaving the funds invested given that they would likely breach the lifetime allowance assuming returns are greater than inflation?

It should be better to drawdown as much as possible tax free or at basic rate tax and put any unused cash into S&S ISAs. This also has the advantage of minimising any higher rate tax you will need to pay if you want to drawdown all your DC pension cash before you die.



However if you want to leave as much as possible in the pension to reduce IHT you will need to do some calculations.

jdl920p

Thanks Linton, that's help my thinking

I'm now going down the rabbit hole of reading up on Benefits Crystallisation Events - will possibly post further questions when I get stuck

EdSwippet

Good advice above from Linton. A couple of additional questions/points.

Are you currently paying into any of these pensions, and if so, which? If DC then you might want to think about reducing or stopping your own contributions to minimise your future LTA excess penalties. What to actually do here depends on any employer match, your tax rates now and at retirement, and ... well, a bunch of guesswork about what government fiddling about with pensions will occur between now and age 55. If DB, somewhat similar factors, with the addition of possible good guarantees or other features of DB pensions not available in DC ones. Note that DB pensions are currently treated far better for LTA purposes than DC ones.

If you take more than 25% PCLS from your DC pensions, you trigger the MPAA reduction in your DC pensions annual allowance, so down from £40k/year (potentially tapered) to a mere £4k/year. Taking just the PCLS parts does not trigger this, though. Watch out for this if you plan to work past age 55 and also continue make pension contributions. (Although honestly, once you hit the LTA there is a strong motivation to retire early and so avoid its worst effects. Consider early retirement -- I did, motivated by reaching the LTA, and have no regrets.)

I take it you can no longer qualify for Fixed Protection 2016? It would help if you could, but making any pension contributions since April 2016 would disqualify you.

jdl920p

I have rounded up my figures in the example above for ease, and I am stopping contributions this year to make sure I stay under the LTA. So no more contributions beyond the end of this tax year.

Now I understand multiple BCEs better things make more sense. HMRC's Pension Tax Manual explains it all so simply!! (that's sarcasm by the way)

Albermarle

Just worth noting that is you take DB pension early , it is still only 20X for LTA purposes.
So from an LTA point of view it makes sense to take DB pension early but could be many other things to take into consideration before doing that.