Transfer valuation from DB Pension - advice

jamesd

You can take 25% of the lifetime allowance as a tax free lump sum. There isn't any tax free lump sum available on the part that's above the lifetime allowance.

With today's £1,055,000 allowance that's £263,750 of tax free lump sum. The remaining 75% of this has no further lifetime allowance charge but is subject to income tax as you withdraw it.

From the remaining £1,700,000 - £1,055,000 = £645,000 you can use the small pots rule three times to take another £30,000 without lifetime allowance charge. Subject to income tax, though.

That leaves £615,000 that's subject to one of the lifetime allowance charges as you take each portion of it, either:

1. pay 55% for lump sum charge, no income tax. So touch £100,000 and the pension company will pay HMRC £55,000 and you £45,000.

2. pay 25% for income charge and the rest is subject to income tax when paid to you. Say touch £100,000 and the pension company will pay HMRC £25,000 and you can use the remaining £75,000 to buy an annuity, add to your drawdown pot or some of each. Now the income tax:

• 2a. assuming you draw it out within the basic rate band the 20% income tax is £15,000 and you get £60,000. Which means 40% combined lifetime allowance charge and income tax effect.
• 2b. assuming you draw some out subject to higher rate 40% income tax, the income tax is £30,000 and you get £45,000 after income tax. Which means 55% combined lifetime allowance and income tax effect.

Even though both 1 and 2b cost you 55%, paying income tax can beat paying lifetime allowance charge because you can do VCT buying to reduce the income tax effect. So continuing 2b you could spend £100,000 buying VCTs. The income tax relief on that is £30,000 paid to you by HMRC direct to your bank account after the end of the tax year. After five years you could sell the £100,000 of VCTs, plus or minus investment performance, to get that £100,000.

Because the basic rate band is use it or lose it each year and you can afford to take more than 50k a year it's probably best to take 50k income taxable each year and top that up with money from the tax free lump sum.

mark55man

masterful analysis from jamesd

I am not an expert but have read a lot. the trouble with pensions there are so many options and it depends on your circumstances. Mick - I would work very hard to understand the options, jamesd has been posting on this topic for decades but there is a basic point here - saving money on tax is not wrong, and wrong decisions or trying to avoid the complexity could cost a lot. but broadly it breaks (in my head) into the following aspects

* although generally there is fierce debate over whether people should take the DB vs the CETV the transfer value offer you have received is mind bogglingly good and swings the scales in 99% people towards taking the transfer and not taking the pension (so long as you can live with waiting to 55 to access it).


* NOW Decision - if you take the transfer (and you don't have an option of not taking advice to do this) then when it is complete you will have £1.7m - fees in your money pension that needs to be invested (DIY or through an IFA) until you get to 55 - (anyone telling you can access the transferred pot earlier is a scam which will end badly for you)


* 55 decision - when you get to 55 you can take a tax free lump sum out up to 25% of the LTA at that point. The 75% that becomes crystallised will be subject to income tax as you withdraw it. The advantage of not taking the whole amount is that hopefully when you take it later your investments will have risen more than inflation and so you will end up with more real (ie inflation adjusted) cash than otherwise. This is complicated.

* After 55 --> 75 decision - The part of the money that you haven't taken is still uncrystallised and you won't pay any LTA or other tax until you do withdraw it. at that point you can either take more as a lump sum and pay 55% or you can take it as income and pay less if you are not a higher rate tax payer and the same (55%) if you are a higher rate payer. (This means there is a benefit in doing it before you take state pension whether deferred or not). jamesd mentioned VCT - these are an advanced product that don't make a huge return but have the feature that you can claim some income tax back of them.


* 75 decision - When you get to 75 - the pot will be assessed anyone (I think - I'm less sure on mechanisms at this point) and after that assessment you will work with what's left - either drawing as income or leaving to kids (this bit is complicated - but is an option you wont have if you remain DB)

good luck to you Mick. Don't also forget that there are other things - eg ISA which you and your OH can fill up on to protect that money and its investment returns from other taxes

Silvertabby

mark88man wrote: »

The trouble with pensions there are so many options and it depends on your circumstances and your date of death.

Expanded that for you.

mark55man

Silvertabby wrote: »

Expanded that for you.

Well I know the years bit begins with 20. The rest is in the lap of the gods

Mick70

Thanks guys , appreciate the help .
I’m back at work tomorrow after a 2 week annual break , will speak to my FD and explain the situation and how I go about getting independent financial advice

Mick70

Just a quick one folks , still with the LTA .
If take a 25% lump sum (now understand can only take 25% of the LTA not the full fund value), so say £250k.
I thought that would count as 25% of your LTA used it but an article I read made out it would be 100% as you have to ACCESS £1m in order to get the £250k lump sum and it is based on how much you Access? Confused ...

Also , sorry! The bit about it being tested again when you turn 75, I don’t fully follow that bit. If prior to 75 the LTA has been triggered then why would it be tested again ? And if you hadn’t used your full LTA by 75 I still don’t fully understand why tested again , does it mean you get hit twice somehow ?
Many thanks in advance ,
Thick Mick

Albermarle

To take £250K tax free from a pension pot , then £1 million pound has to be crystallised .
The remaining crystallised £750K goes into drawdown and will be taxable if withdrawn .
All money crystallised is measured against LTA , regardless of the fact it is still in the pension.
So as today the LTA is £1.055 million you will have used 94.78% of it.

When you reach 75 any money that remains uncrystallised is then counted for LTA.
Also growth in unused crystallised funds is measured .

The second test at 75 is partly to stop people avoiding LTA charges by never crystallising their pension.

It's quite complicated and as mentioned in previous posts you really need an IFA to advise you due to the very large amount of money involved .

jamesd

Mick70 wrote: »

The bit about it being tested again when you turn 75, I don’t fully follow that bit. If prior to 75 the LTA has been triggered then why would it be tested again ? And if you hadn’t used your full LTA by 75 I still don’t fully understand why tested again , does it mean you get hit twice somehow ?

Say you take benefits from a million worth, 25% tax free and 750k into a drawdown account that you don't touch. After 20 years of 4% assumed growth it'd be worth 2.19 times as much, 1642.5k. You'd have 1642.5k - 750k = 892.5k of growth that'd use more lifetime allowance or be subject to the lifetime allowance charge. Expensive... but easy to avoid. If growth is 4% then you take out that 4% as income on average each year, 30k a year. And even if that was all taxed at 40% it'd be cheaper than the lifetime allowance charge so it's pretty easy to decide to take it.

Then there's the 615k above the lifetime allowance. Probably best not to leave that to 75 and pay lifetime allowance charge of 55% on it. So before 75 you probably should take it as income with the 25% lifetime allowance charge for that. After the charge that's 461.25k more in the drawdown pot (or used for annuity buying or some of each). 4% a year on that is another 18.45k a year to take out to avoid growth.

Which means that with historic levels of mixed investment growth you'd be taking taxable 30k + 18.45k = 48.45k a year just to keep up and avoid becoming richer. Quite a nice problem to have! Don't grumble to your mates about this problem, though, they might not be sympathetic...

Of course you might live through less good than average times. Which in part means less lifetime allowance charge... the taxation actually ends up reducing the negative effect of living through bad times due to the lower tax cost.

Why the checks at 75? Easy: inheritance tax. Money in a pension isn't part of a person's estate so keeping lots of money in pensions is an inheritance tax avoidance tool. The checks at 75 get some of that otherwise lost inheritance tax revenue. Or push those who are very well off but not very rich to use pensions what they are for and take the income along with being subject to income tax on it.

Inheritance planning needs some thought later but pension contributions for kids is one approach. Their comparatively young age, particularly any grandchildren, means lots of time for compounded investment growth so you could give them your current "problem" of being able to retire young.

Even a baby gets a 3600 a year gross pension contribution allowance and 20% tax relief. Assume it's invested in just equities and grows at 4.5% plus inflation a year. Stick 3600 / 12 = 300 a month at 4.5% into a regular savings calculator for 18 years. 99,560 at age 18. Now delete the 300, put the 99,560 as the lump sum and change the years to 42, assuming they won't be allowed to touch it until 60. That's 656,698. In today's money. For a before tax relief cost to you of 2880 a year for 18 years each. A pretty good deal and as gifts out of income it's not subject to inheritance tax. If you wanted to carry on with the 3600 after 18 delete the 99560 and put back the 300 a month for say 20 years: another 116,437 until your presumed death. Delete the 300, put in the 116,437 lump sum and set years to 22: 285,907 on top of the 656,698.

Mick70

so at 75 the LTA tax is a one off charge , rather than an annual charge , is this right ?
and it is based on the value of your pot at that time and only the growth in any unused funds that you have drawdown ?
i.e at age 58 lump sum 250k, drawdown 750k , if by age 75 i have been using the drawdown as regular pension income and was say £100k left then there would be no LTA tax to pay on that, the LTA tax would only be on the value of my pot ?
lets say the pot which was reduced to £700k (when i took lump sum and £750k drawdown) has grown to £1.3m by time 75 , so the LTA charge would be (£1.3-£1.055)*25% one off charge and no further charges each year - would that be right ?

sorry in advance !
Mick

jamesd

Mick70 wrote: »

so at 75 the LTA tax is a one off charge , rather than an annual charge , is this right ?
and it is based on the value of your pot at that time and only the growth in any unused funds that you have drawdown ?

Yes to both.

Mick70 wrote: »

i.e at age 58 lump sum 250k, drawdown 750k , if by age 75 i have been using the drawdown as regular pension income and was say £100k left then there would be no LTA tax to pay on that, the LTA tax would only be on the value of my pot ?

Yes.

Mick70 wrote: »

lets say the pot which was reduced to £700k (when i took lump sum and £750k drawdown) has grown to £1.3m by time 75 , so the LTA charge would be (£1.3-£1.055)*25% one off charge and no further charges each year - would that be right ?

No. When you took the lump sum and drawdown that would have used all or almost all of your lifetime allowance. If the 700k grew to 1.3 million the charge would be on 1.3 million - 750k - remaining lifetime allowance.