No Access to 25% Lump Sum

Maverock

I was wondering if someone here could help me.
I started drawing this Final Salary pension last November but declined the offer of the 25% tax free option.


I have since decided that it may be worthwhile taking this money and reinvesting for 5 years or more to give me further options down the road.


However, on contacting my pension provider I was told that as I was already drawing the pension this option is no longer available.


Could someone please confirm that this is correct?

Dox

Yes, it's correct. With a final salary scheme, you have once chance to take tax free cash - at the time you first start to draw your benefits.

dunstonh

I started drawing this Final Salary pension last November but declined the offer of the 25% tax free option.

Technically, there is no 25% tax-free option with a defined benefit scheme. The lump sum is worked out to give a broadly equivalent amount but using a calculation method to achieve it.

could someone please confirm that this is correct?

Correct. It is cast in stone when you made the decision.

lisboa84

dunstonh wrote: »

Technically, there is no 25% tax-free option with a defined benefit scheme. The lump sum is worked out to give a broadly equivalent amount but using a calculation method to achieve it.

Should most DB lump sum calculations give broadly a 25% equivalent?

I'm calculating my Dad's potential lump sum using the formula given from his company's pension booklet, and it only comes to around 10%.

Silvertabby

lisboa84 wrote: »

Should most DB lump sum calculations give broadly a 25% equivalent?

I'm calculating my Dad's potential lump sum using the formula given from his company's pension booklet, and it only comes to around 10%.

Can you post the formula? It does sound rather odd.

lisboa84

Maybe I'm miscalculating.

The formula is 3/80 X years of service X final salary.

xylophone

https://www.pensionsadvisoryservice.org.uk/content/publications-files/uploads/DB_Options_Pension_Flex_SPOT024_V1.pdf

You can normally take tax free cash when you retire from a DB Pension (typically up to 25% of the value of your pension) but you will generally have to give up a part of your pension for cash.
 The rate for giving up pension for cash will be set by the scheme trustees. These are not guaranteed and may change from time to time in line with changing financial conditions.
 The amount of tax free cash you wish to take will depend on your preference for an initial tax free lump sum cash payment, or a higher income for the rest of your life.







https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pension-commencement-lump-sum-tax-free-cash/


How to calculate the amount of tax-free cash
This is slightly different for different types of pension. For defined contribution schemes it’s less complex and is 25% x value of the fund.

For defined benefit schemes the calculation is 25% x (tax-free cash + residual value), but a commutation factor is needed.

Max cash = (20 x commutation factor x yearly scheme pension before commutation)
20 + (3 x commutation factor)

You may recognise the formula above expressed as

Max cash = Pre-commutation pension x Commutation factor
[1+(0.15 x Commutation factor)]

The second formula is used within many exam study texts. It’s important to note this formula gives exactly the same answer as the previous (HMRC preferred) method.

Marcon

lisboa84 wrote: »

Maybe I'm miscalculating.

The formula is 3/80 X years of service X final salary.

Sounds like an automatic lump sum + pension (3/80 of final pensionable pay for each year of pensionable service as a tax free lump sum + 3/80 of final pensionable pay for each year of pensionable service as a pension).

The rules of the scheme may or may not permit your dad to give up ('commute') some of his pension for a further tax free lump sum.

Marcon

xylophone wrote: »

You can normally take tax free cash when you retire from a DB Pension (typically up to 25% of the value of your pension) but you will generally have to give up a part of your pension for cash.
 The rate for giving up pension for cash will be set by the scheme trustees. These are not guaranteed and may change from time to time in line with changing financial conditions.
 The amount of tax free cash you wish to take will depend on your preference for an initial tax free lump sum cash payment, or a higher income for the rest of your life.

Not necessarily. The rules of the scheme will dictate the maximum tax free lump sum a member can take at retirement (up to a maximum of that permitted by HMRC, but could well be less - and trustee consent may be required).

GunJack

lisboa84 wrote: »

Maybe I'm miscalculating.

The formula is 3/80 X years of service X final salary.

That's standard Principal Civil Service Pension Scheme, Classic variety. The only way to increase the lump sum is by giving up some of the annual pension at a commutation rate of 12:1, i.e. every £1 of annual pension gves £12 of extra lump sum up to a max lump sum - ask MyCSP for your options.

Malthusian

As others have said you are stuck.

Have you considered taking the surplus income that you are receiving as a result of declining the tax free cash, and investing in it in a stocks and shares ISA or other tax-efficient investment over the next five years?

It won't be as much as if you'd invested the tax free lump sum from the beginning, but it would be something.