Paying tax on DB pension

agent69

I'm trying to fine tune my calculations regarding my predicted income when I'm fully retired, but unfortunately I'm having a bit of a senior moment when it comes to my DB pension income.


I can take up to 25% of the value of the pension as a tax free lump sum, with a corresponding reduction in the monthly pension payments. However, if I chose not to take any tax free lump sum will all of the monthly payment be taxed, or will 25% be tax free?

zagfles

It will all be taxed. The opportunity to take the TFLS is a one off and if you don't take it you don't get any tax free payments.

But it's a bit like "duty free", usually even worse. Schemes usually offer rubbish commutation rates like a 10:1 (ie £10 TFLS for every £1 reduction in pension, when the market rate may be £30 for every £1 pension reduction), a bit like airports/airlines selling duty free usually just replacing duty with extra profits for themselves rather than savings for the customer.

agent69

zagfles wrote: »

It will all be taxed. The opportunity to take the TFLS is a one off and if you don't take it you don't get any tax free payments.

But it's a bit like "duty free", usually even worse. Schemes usually offer rubbish commutation rates like a 10:1 (ie £10 TFLS for every £1 reduction in pension, when the market rate may be £30 for every £1 pension reduction), a bit like airports/airlines selling duty free usually just replacing duty with extra profits for themselves rather than savings for the customer.

Thanks for the confirmation.


I thought that was the case, but it appears unfair that in one scenario 25% is tax free, but in another it is all taxable.

molerat

With some schemes you can reduce your monthly taxable amount for an increase in your tax free lump sum so it can work both ways.

Audaxer

agent69 wrote: »

Thanks for the confirmation.


I thought that was the case, but it appears unfair that in one scenario 25% is tax free, but in another it is all taxable.

Yes, but in many cases the higher monthly pension is preferable, even if subject to tax. If the commutation factor on your DB pension is poor like about 12:1, then unless you really need the lump sum, it may be best to take the higher pension even although it's taxable. Someone yesterday posted they had a DB pension with a commutation factor of over 26:1. As that amounted to a substantial lump sum, for the amount of pension reduction, it was definitely a consideration to take the lump sum, even to invest it as it could produce income to match the full pension when added to the reduced pension. Do you know what your commutation factor is?

agent69

Audaxer wrote: »

Yes, but in many cases the higher monthly pension is preferable, even if subject to tax. If the commutation factor on your DB pension is poor like about 12:1, then unless you really need the lump sum, it may be best to take the higher pension even although it's taxable. Someone yesterday posted they had a DB pension with a commutation factor of over 26:1. As that amounted to a substantial lump sum, for the amount of pension reduction, it was definitely a consideration to take the lump sum, even to invest it as it could produce income to match the full pension when added to the reduced pension. Do you know what your commutation factor is?

I'm not familiar with the term commutation factor, but assuming it is the ratio of TFLS to the reduction in pension, then my value is 18.


I'm single without dependents and don't need the lump sum, but like everyone else I like to make the best of what's on offer.

Audaxer

agent69 wrote: »

I'm not familiar with the term commutation factor, but assuming it is the ratio of TFLS to the reduction in pension, then my value is 18.


I'm single without dependents and don't need the lump sum, but like everyone else I like to make the best of what's on offer.

Well 18 is not the best but an okay commutation factor, so worth considering. If you just put it in a savings account, it may last you about 20 years if you are drawing out the equivalent annual amount after tax, increasing with inflation, to equal the full pension. However if your retirement lasts 30 years or more you would be losing out at least 12 years money compared to the full pension. If you invest it within and S&S ISA over a few years it should last longer but not necessarily throughout a 30 year retirement. In your position, being single with no dependents and no need to take the lump sum, I would opt for the full pension.