Transfer valuation from DB Pension - advice

jamesd

Mick70 wrote: »

some say take the transfer while some would stick with the DB and lumpsum

As one of the best deals we've seen your situation serves in one way to identify those who will always say don't transfer because that's their own preference for themselves. Some people just aren't comfortable with investing or safe withdrawal rates or don't trust the state pension or whatever else.

But are you and can you get to a mixture that leaves you comfortable is the question, so maybe discussing those things would be useful.

Where do you get to on understanding the LTA?

It's calculated for portion of the pot as you take them. Up to the LTA you get 25% tax free, above it you don't and also have some LTA charge to pay, with a lower charge for income vs lump sums.

jamesd

Thrugelmir wrote: »

What's going to cause annuity rates to suddenly rise?

A year or so the BoE did a no deal brexit study which considered a case where tariffs and other effects could cause inflation to go over 6% and require the Bank to raise interest rates to 4% for several years to get back to its 2% target. So it's potentially going to happen fairly soon.

Because the increase would be for a limited time the effect on annuity rates would be modest.

jamesd

Mick70 wrote: »

Unsure what mean about annuity rates and their impact on the pension ?

Annuity rates refer to how much income a year you get for each Pound you spend. Around 3% of the amount spent at age 55 to buy an annuity that doesn't increase with inflation each year, called "level". So spend £100,000, get £3,000 a year of annuity income.

Annuity rates tend to increase as people get older or less healthy because the company will have to pay for fewer years.

Drawdown calculations normally increase with inflation each year with no cap (the 4% rule) or usually, depending on how investments do (the Guyton-Klinger rules). For both, other increases would be expected unless you lived through a repeat of the worst conditions in the last century or so. Normal annuities never have extra increases, you just get paid the set rate whatever happens.

Mixed drawdown approaches would tend to use a combination of investments and buying guaranteed income in some way. I'll typically suggest deferring claiming the state pension because that's a good value for money way to get guaranteed inflation-linked income for life. Similarly I'll tend to suggest annuity buying starting in the age 75-85 range because increasing death rates improve the income per Pound spent on them due to the annuity companies knowing that on average they will have to pay out for far fewer years.

Mick70

Sorry for being bit slow but still struggling to work out the LTA impact if I take the Dc transfer offer of £1.7m.
Does that mean I am better off not taking any lump sum as would get taxed higher .
Doesthe LTA charge need paying once you have accessed £1.05m of your pot ? And everything over that £1.05m is then taxed at normal tax rate PLUS an additional 25% each year until the pot runs out effectively ?

Mick70

Anyone able to help with that LTA query I posted ?

Albermarle

As you already know the LTA only applies when you take benefits from your pension pot , these are known in the jargon as BCE's ( Benefit Crystallisation Events )
When you take a DB pension , you multiply the annual income x 20 + any lump sum you take . A DB pension is treated very leniently for the LTA ( there is an argument that this 20x should be increased to more reflect the real value.
With a DC pot going into drawdown for example . If you take £200K tax free cash , then £600K would go into drawdown. This would be a BCE of £800K so would use up 76.2% of your LTA ( currently set at £1,05Million). Then say three years later you took another £100K tax free cash and £300K went into drawdown , then the BCE is £400K . By this time the LTA will have risen with inflation to say £1.13 million . so you would use up 35.4% of the LTA at that time . So now you have gone over the 100% of LTA by 11.6% and you will be liable for an extra tax/charge on that . Then in future any new BCE will be over LTA and you will pay tax /charge on that .
If you were to take an annuity instead of drawdown this is also a BCE as are a few other things , See link below for full explanation.
https://adviser.royallondon.com/technical-central/pensions/benefit-options/lifetime-allowance/

LHW99

Just out of interest, as I would never be anywhere near - if a pot exceeds the LTA, hasn't been drawn, and the owner dies before age 75 - would that still pass to beneficiaries tax free, or would there be tax to pay?

jamesd

LHW99 wrote: »

Just out of interest, as I would never be anywhere near - if a pot exceeds the LTA, hasn't been drawn, and the owner dies before age 75 - would that still pass to beneficiaries tax free, or would there be tax to pay?

Death before 75 is BCE5C or BCE5D and an effectively normal lifetime allowance calculation is done, but with differences in who does what, like the executor paying from the estate rather than the pension scheme.

jamesd

Mick70 wrote: »

Sorry for being bit slow but still struggling to work out the LTA impact if I take the Dc transfer offer of £1.7m.
Does that mean I am better off not taking any lump sum as would get taxed higher .
Doesthe LTA charge need paying once you have accessed £1.05m of your pot ? And everything over that £1.05m is then taxed at normal tax rate PLUS an additional 25% each year until the pot runs out effectively ?

Always take the tax free lump sum on the part up to the lifetime allowance, unless you have a well thought out inheritance tax plan that makes not doing it better.

Above the lifetime allowance there isn't any tax free lump sum. For that part there's no certain rule because it depends what you want to do.

For the rest I'll assume that you've already taken a tax free lump sum all the way up to the lifetime allowance.

I wrote in another post about doing some gradual annuity buying. If the annuity is for you then buying out of the pension pot would usually be best. Since annuities are income that means that the 25% income lifetime allowance charge would be due on what you spend. The income from the annuity would be normal taxable income. That could mean the total cost being 25% plus 20% or 40% income tax or a bit of 20% and a bit of 40%. Since the job of the annuity would be paying you a core guaranteed income it seems best to think of it as taxed at 25% plus 20%.

Beyond annuities and state pension some probably would have income tax at 20% and some at 40%. Just because you could afford to take way more than 50k a year, so some would end up at 40%.

For the part at 20% income tax, taking it as regular income and paying the 25% lifetime allowance charge seems best.

[STRIKE]I'll add more later by editing[/STRIKE]

Mick70

Thank you .
Would probably take a lump sum (can I take 25% of the whole pot? If so then 450k lumpa , use that for a few year , then I would ideally like to drawdown 45-50k a year for us to live on and hope the pot lasts