Tax free lump sum

the_cat

Hi All
What is the general opinion on taking out the max lump sums from both DB and SIPP payments, verses taking the DB larger payment option?
We are just putting the final plans together for OH to retire (he's 58).
I have no personal pension so would rely on the spouse pension longer term and his gut feeling is to take the full lump sum he can out of every pot to liquidise as much cash as possible for me to use if I need to and invest it separately. However the spouse pension at the higher rate should be enough to cover the bills (just about). The reduced one would leave me a bit short each month

We have other savings of £250K including our SIPP and own our house outright worth £500K

Obviously I realise the 'right' answer depends on how long we both live! We are both risk averse and I'm wary of the wrong decision so any help would be much appreciated

ffacoffipawb

If i took the lump sum out of my DB pension it has no effect on my spouse pension.

If I took the PCLS I would exchange about 22% of my DB for a lump sum equivalent of 24 times the pension. As the pension is taxed and the lump sum us not, this is equivalent to 30 times.

I am 55 and that pension is RPI linked up to 5%.

The early retirement factor makes it worth taking early and that reduces the LTA used up.

However, even though I will take early retirement, I am unsure which option to take!!! This is because the 24 (effectively 30) multiplier makes the cash option very tempting.

This is a pension from a previous employer. I don't need to actually retire to claim it as I no longer work for them.

What is your OH's commutation factor for the lump sum?

cfw1994

I don’t know if there is a general consensus....taking the larger lump out could mitigate against unknown future pension changes....my main pot is DC, & I plan to take a reasonable chunk (& mostly reinvest it!) soon after 55, partly to ‘hedge’ against future changes!

On the risk front: is OH healthy and looking after their health, or is there a heightened risk of early demise? Depressing question to ask, I know, but that is a risk factor to consider!

I am personally less risk averse....on investments, I feel that if I get the 30+ year retirement I hope for, then I need market-beating returns rather than “safe” returns that might lose out to inflation!!

the_cat

Thanks for replying. Commutation factor is £26.60 I think, although it's the first time I've heard the term so may have done it wrong!

Difference between two DB pension amounts £4099 PA. lump sum £109052.
tax rate will be kept to 20% tier for OH. I'm unlikely to pay much if any tax assuming thresholds go up in line with inflation. DB pension has a guaranteed 5% increase per year

crv1963

It does depend on individual circumstances and attitude to risk- not only investment risk but health and family history.

For every £1 of pension I give up I would get £12 as lump sum a very poor rate but that would not make any difference to survivor pension, which remains unchanged regardless of what I do or do not take.

I have to weigh up health risks, had one heart attack but told now my life expectancy is to around my cohort average of 86 years so a potential 30 years pension income against family average male deaths all coming in at 75 or under.

The main question could be do you need the extra cash? Or would both benefit from the extra income? Given IHT consideration is it better placed simply taking the extra income?

the_cat

Interesting points to consider, thank you.
OH is as far as we know is completely healthy,good weight,exercises,never smoked etc etc so no issue there. Conversely both his parents died young (cancer) Hmmm, who knows eh?!
We will most likely opt for the large lump sum as the main financial risk is if OH dies young before we have had a chance to start drawing state pensions as until then we will be using savings/SIPP drawdowns to top up the DB. After SP kicks in we would be in monthly surplus again and increasing capital. I'm only 53 so its a long time yet before I'm eligible for SP?
Does that Sound sensible?

Will have to start haunting the savings board to find out what to do with it all........

SonOf

What is the general opinion on taking out the max lump sums from both DB and SIPP payments, verses taking the DB larger payment option?

Depends on the objectives.

If there are no lump sum objectives currently, then why take the lump sum? (especially from the SIPP) The DB scheme may or may not be more favourable to taking income but it depends on the terms. However, money purchase schemes should have no up front money taken from them in the form of the 25% tax free unless there is a justification for doing so. The 25% is available at any time. The longer it is invested, the greater the 25% tax free will be. Spreading it over multiple years gets more out.

Too many people take out the 25% at the start and stick it in a bank account. Crazy. But that is what they do.

ffacoffipawb

SonOf wrote: »

Depends on the objectives.

If there are no lump sum objectives currently, then why take the lump sum? (especially from the SIPP) The DB scheme may or may not be more favourable to taking income but it depends on the terms. However, money purchase schemes should have no up front money taken from them in the form of the 25% tax free unless there is a justification for doing so. The 25% is available at any time. The longer it is invested, the greater the 25% tax free will be. Spreading it over multiple years gets more out.

Too many people take out the 25% at the start and stick it in a bank account. Crazy. But that is what they do.

People can be paranoid about the PCLS being abolished or severely reduced. However I took the full 25% from my SIPP at age 55 due to LTA issues. I paid off the mortgage, bought a car and a new kitchen. What's left will be fed into S&S ISA over the next three years. I utilised 70% LTA by doing this.

LTA is still likely to be an issue, but not as much as it would have been.

Special case admittedly.

LTA is also the reason why I am taking my DB early at 55 (17.5% LTA for pension or 18.3% LTA for PCLS and reduced pension).

This leaves me only 12% or so LTA for all my other pensions. My smaller DB will use all of that if I took it at 65 (it has a high GMP element with 7% revaluation).

Sadly my current employer DC and the amount I partially transferred to HL is going to be above LTA (about 15% LTA at the moment) so that will stay uncrystallised til 75 unless I need it earlier.

SonOf

However I took the full 25% from my SIPP at age 55 due to LTA issues. I paid off the mortgage, bought a car and a new kitchen. What's left will be fed into S&S ISA over the next three years. I utilised 70% LTA by doing this.

Hence why I said there should be a justification for doing so. You had reasons that justified it. You didnt just take the lot and stick it in a bank account for the next 25-30 years. It sounds like you had a plan and reasons and ways to mitigate. Sadly not that many are like you.

the_cat

SonOf wrote: »

Depends on the objectives.

If there are no lump sum objectives currently, then why take the lump sum? (especially from the SIPP) The DB scheme may or may not be more favourable to taking income but it depends on the terms. However, money purchase schemes should have no up front money taken from them in the form of the 25% tax free unless there is a justification for doing so. The 25% is available at any time. The longer it is invested, the greater the 25% tax free will be. Spreading it over multiple years gets more out.

Too many people take out the 25% at the start and stick it in a bank account. Crazy. But that is what they do.

Wow, that's given me an idea........
Is is possible to send money direct from a DB pension income direct to a SIPP in the same way as AVC's from a salary? If so, I could reduce my 'income' down to £12500 and have the excess paid tax free to the SIPP. Or is there another way to claim back the tax retrospectively but still gain the same effect?
Then live off the other savings to plug the gap

ffacoffipawb

the_cat wrote: »

Wow, that's given me an idea........
Is is possible to send money direct from a DB pension income direct to a SIPP in the same way as AVC's from a salary? If so, I could reduce my 'income' down to £12500 and have the excess paid tax free to the SIPP. Or is there another way to claim back the tax retrospectively but still gain the same effect?
Then live off the other savings to plug the gap

Unlikely. You can get the DB paid into your bank account and use that to fund a SIPP. Usual contribution limits apply.