Tax free lump sum

Dazed_and_confused

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?

Contributions to a "relief at source" pension scheme such as a SIPP do not reduce your taxable income. They increase the amount of basic rate tax you can pay. So for most people they make no difference whatsoever to your personal income tax liability.

It is only if you are a higher rate payer (or are Scottish resident for tax purposes and paying the intermediate rate of tax) that you get any personal tax benefit over and above the basic rate tax relief added to the pension fund.

Audaxer

the_cat wrote: »

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

If the commutation factor is 26.6 then that is very high and one good reason for taking the lump sum. If you can tell us how much the maximum pension is without lump sum and the reduced amount with lump sum, we can check whether that commutation factor is correct.

The important thing to bear in mind from your point of view as the spouse, is that with most DB pensions the spouse entitlement on death is usually 50% of the full pension even if your OH had taken the lump sum.

If that commutation rate is correct, the lump sum invested could most likely give you income to make up the difference from taking the reduced pension, so clearly to your benefit, as you would still have access to the capital and 50% of the full pension on death of your OH.

the_cat

Pension without lump sum £20456 p a

With lump sum this reduces to £16357, with a lump sum of £109052 tax free

Spouses pension as you correctly guessed is at 50%. I feel a bit stupid having not read the small print and assuming, but you are right, it does not go down with a lump sum so would be at £10228 regardless.

Albermarle

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

If you want it to grow at a reasonable rate long term , you need to haunt the investment board , not the savings board . Savings go down in value every year as the interest rate is less than the inflation rate .

This reinforces previous comments that taking the tax free lump sum from investments in a Sipp and putting them in a saving account , would be unlikely to be a good move long term . If you do not need it , leave it where it is . For the DB pension it is more debatable what to do as also explained already.

BoxerfanUK

the_cat wrote: »

Pension without lump sum £20456 p a

With lump sum this reduces to £16357, with a lump sum of £109052 tax free

Spouses pension as you correctly guessed is at 50%. I feel a bit stupid having not read the small print and assuming, but you are right, it does not go down with a lump sum so would be at £10228 regardless.

Are you saying that as standard, his pension of £20,456 comes WITHOUT any lump sum at all, but for a reduction of £4099 pa he gets a Lump Sum of £109052?

Just wanted to double check, because for example, my pension in common with a lot of schemes came as a pension amount along with a standard lump sum of 3x the pension or alternatively I could opt for a lower pension and an INCREASED lump sum

the_cat

Albermarle wrote: »

If you want it to grow at a reasonable rate long term , you need to haunt the investment board , not the savings board . Savings go down in value every year as the interest rate is less than the inflation rate .

.

Thanks. A figure of speech I guess, as I haven't looked properly and assumed savings/investments was all one board!

IFA is looking the likely option.

the_cat

BoxerfanUK wrote: »

Are you saying that as standard, his pension of £20,456 comes WITHOUT any lump sum at all, but for a reduction of £4099 pa he gets a Lump Sum of £109052?
Just wanted to double check, because for example, my pension in common with a lot of schemes came as a pension amount along with a standard lump sum of 3x the pension or alternatively I could opt for a lower pension and an INCREASED lump sum

That's right. Option one specifically states 'no tax free lump sum'

There is a third option where we pick the lump sum somewhere in the middle and get an appropriately reduced pension

BoxerfanUK

the_cat wrote: »

That's right. Option one specifically states 'no tax free lump sum'

There is a third option where we pick the lump sum somewhere in the middle and get an appropriately reduced pension

Ok that's fine just wanted to double check.

Dox

the_cat wrote: »

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?

No. Has to be paid to you (the rules of the DB scheme will stipulate that, with rare exceptions if someone does not have capacity to handle their own cash - in which cash it will be paid to another person on their behalf).

Audaxer

the_cat wrote: »

Pension without lump sum £20456 p a

With lump sum this reduces to £16357, with a lump sum of £109052 tax free

Spouses pension as you correctly guessed is at 50%. I feel a bit stupid having not read the small print and assuming, but you are right, it does not go down with a lump sum so would be at £10228 regardless.

That does work out at a commutation factor of 26.6 which is really good. Although the full pension is £4,099 per year more, after tax it is only £3,279 more. That is only 3% of the lump sum, so if the lump sum was taken and invested, I think you could easily draw 3% income, rising each year with inflation, to match or exceed what you would get from the full pension, without risking running out of money. Seems like a very good option in my view.