Tax treatment of DB pensions

ProDave

I understand how DC pensions are treated, I have already drawn the 25% tax free lump sum and have the rest waiting to draw when I want to which will be taxable income.

But I am unsure of how tax is dealt with on Defined Benefits pensions.

One I have, that I have been drawing since the age of 50, gave me no lump sum, just a monthly income for which they give me a P60 and it goes on my tax return each year and I pay tax on that.  I don't seem to have got any tax free element from that at all.

The other pension I intend to draw in a little under 3 years.  I get the option of the standard lump sum plus a pension, or a larger lump sum and a smaller pension.  They say the  lump sums are tax free and the larger option is the maximum lump sum you can get tax free.  So surely if I choose the standard lump sum, then I have not taken all my tax free allowance, so a portion of the monthly payment should be made tax free?

Anyone care to explain how it works please?

Linton

If you choose not to take all of the tax free lump sum you dont get any of your income tax free.  For DB pensions it is a matter of take it or lose it.  So you need to take that into consideration when deciding whether to take the lump sum, though you may well find that  the lump sum is still not good value.

Albermarle

One I have, that I have been drawing since the age of 50, gave me no lump sum, just a monthly income

Possibly this was some kind of special case, as normally you can take any pension until 55.

Marcon

ProDave said:

I understand how DC pensions are treated, I have already drawn the 25% tax free lump sum and have the rest waiting to draw when I want to which will be taxable income.

But I am unsure of how tax is dealt with on Defined Benefits pensions.

One I have, that I have been drawing since the age of 50, gave me no lump sum, just a monthly income for which they give me a P60 and it goes on my tax return each year and I pay tax on that.  I don't seem to have got any tax free element from that at all.

The other pension I intend to draw in a little under 3 years.  I get the option of the standard lump sum plus a pension, or a larger lump sum and a smaller pension.  They say the  lump sums are tax free and the larger option is the maximum lump sum you can get tax free.  So surely if I choose the standard lump sum, then I have not taken all my tax free allowance, so a portion of the monthly payment should be made tax free?

Anyone care to explain how it works please?

Two possibilities in respect of the pension you've been drawing since the age of 50: either you were offered the option of a lump sum and chose not to take it; or (more likely) your pension contains an element of 'Guaranteed Minimum Pension' (because you were contracted out of SERPS/the State Second Pension while you were a member) and allowing you to take tax free cash would mean there wasn't enough to pay the GMP when you get to age 65. I'm sorry that is all a bit technical, but if your membership was sometime in the period between 1978 and 1997, it is highly likely to be why.

DB pensions give you a one-off chance to take tax free cash at the point you start to draw benefits from the scheme. The amount varies depending on the rules of the scheme, subject to a maximum limit imposed on all DB schemes by HMRC, and what the member chooses. The DB pension itself, once in payment, is all potentially subject to tax.

xylophone

Possibly this was some kind of special case, as normally you can take any pension until 55.

Some pension schemes had a protected pension age.

https://www.jameshay.co.uk/OldCMS/DocumentView.aspx?DocumentID=306

crv1963

Hi ProDave-
I've just started taking my DB, but also retired and returned to the workplace. Today I got my tax code notice from HMRC, it splits my tax allowance across my pension and my workplace. They are not split evenly my pension gets the bulk of the allowance but even if the whole allowance had been allocated to the pension I would still be paying tax on it. The lower amount on the salary is stated as "will not change until it has been reviewed by us". I was paid my TFLS first week in May, my first monthly pension payment 1 June. 

ProDave

Thanks.  The one I have been drawing since 50 had a specific clause saying you could draw it from age 50 subject to approval  from the scheme administrator and that aparently overruled the age 55 law.  There was a specific reason for drawing that one early. That was in that time frame, does have a GMP element and was contracted out of SERPS, I don't recall being offered any lump sum option with that one.

Re the second one, I will have to take the different tax treatment into account before deciding what level of lump sum to choose.

Dandytf

With such DB schemes, mines falls into to 'Contracted out of Serps'
Is there any useful way off calculating loss if taken as lump sum from 55.
I had already been advised over Tel that if I want 25% when I reach 55 then it's as some mser's mention -has to be taken as 100% Lum Sum.
I'm interested to know how to calculate what is lost in monetary terms.
Also as DB can be taken from 60, is any loss calculated from 55 until 60 or does it get calculated until state Pension age.
t,i,a,

AnotherJoe

ProDave said:

Thanks.  The one I have been drawing since 50 had a specific clause saying you could draw it from age 50 subject to approval  from the scheme administrator and that aparently overruled the age 55 law.  There was a specific reason for drawing that one early. That was in that time frame, does have a GMP element and was contracted out of SERPS, I don't recall being offered any lump sum option with that one.

Re the second one, I will have to take the different tax treatment into account before deciding what level of lump sum to choose.

Yep, the calculation on how long it takes for the larger monthly payment to overhaul the lump sum and smaller monthly payment needs to take tax into account. (My one worked out to age 99 so lump sum it was !)