Pension Lump Sum....What do people do with it?

IAMIAM

Dox said:

The smart money is increasingly on not taking the maximum tax free cash unless there is an obvious use for it.

Its interesting this, a lot have said this to me too. But then 2/3 years later they regret it because they are paying huge tax on the income become the state pension kicks in on top of suddenly realising they would like to donate some money to family and/or then have an illness

IAMIAM

Sea_Shell said:

DH plans to take max tax free lump sum from DC pension, reinvest it in our ISAs, then just draw his Personal Allowance via drawdown.

We calculate that he should just about get the whole lot out tax free, in the 10 years before other pensions come into play.

This is exactly what I would do. 

crv1963

OP I used my TFLS to clear the mortgage, top up the savings- although these have been depleted by building works to try to prepare our home and garden for retirement and helped out youngest son while he was furloughed and wrote off a loan we'd made for a car for him just before lockdown - oldest got paid 100% of his wages.

As Stubod suggested I had no choice because of the scheme rules, although as I returned to the workplace after a days break in service I'm now auto-enrolled into NEST and have opened a SIPP, when it comes to finally pull the work plug I'll be taking the TFLS and save it in S&S ISA for old, old age unless Mrs CRV decides we're going to do the world travel plans we'd thought about!

NedS

IAMIAM said:

Dox said:

The smart money is increasingly on not taking the maximum tax free cash unless there is an obvious use for it.

Its interesting this, a lot have said this to me too. But then 2/3 years later they regret it because they are paying huge tax on the income become the state pension kicks in on top of suddenly realising they would like to donate some money to family and/or then have an illness

It sounds like they are simply not understanding the options available to them. They can still crystallise (part of) their remaining pot and take 25% tax free lump sum if they need extra cash but don't want to draw taxable income.

AlanP_2

It all depends on whether you have a DB or a DC pension, and then, if it is DB whether there is a lump sum that you havre to take and then what the rate is for converting DB to lump sum and your situation and objectives.

Prior to this post you have answers based on nearly all those permutations.

So, OP, what type of pension are you and your friends talking about?

IAMIAM

AlanP_2 said:

It all depends on whether you have a DB or a DC pension, and then, if it is DB whether there is a lump sum that you havre to take and then what the rate is for converting DB to lump sum and your situation and objectives.

Prior to this post you have answers based on nearly all those permutations.

So, OP, what type of pension are you and your friends talking about?

Defined Benefit

enthusiasticsaver

We had DB pensions and both took our tax free  lump sums (£140k for my DH and £20k for me on pension 1.  I did not take the lump sum on my second smaller DB pension).  We will probably do the same with the 2 DC  pensions again to save tax.   60% of the lump sum was invested in stocks and shares isas over a few years (£100k).  15% was used to put a new kitchen and new bathrooms in our house and some work on the garden. 10% is earmarked for long haul trips (one taken earlier this year) and the other delayed until next year.  The remaining 5% is in Marcus subsidising our existing cash buffer so we do not need to sell investments if we need additional income to change one of our two cars. We also have money invested which can be passed on to our children.  If you give up the lump sum and take the bigger pension surely you pay more tax if it is over the PA? 

enthusiasticsaver

IAMIAM said:

Dox said:

The smart money is increasingly on not taking the maximum tax free cash unless there is an obvious use for it.

Its interesting this, a lot have said this to me too. But then 2/3 years later they regret it because they are paying huge tax on the income become the state pension kicks in on top of suddenly realising they would like to donate some money to family and/or then have an illness

I would agree with this.  If my DH had not taken the lump sum on his DB pension then he would fall into the higher tax bracket once his state pension kicks in and anything he takes  out of his DC pot would then be taxed at the higher rate. Having an investment and savings buffer means if needed we could help our children, fund a round the world holiday or buy a  new car with cash. Surely people look to avoid paying tax on their pension wherever possible?

AlanP_2

enthusiasticsaver said:

IAMIAM said:

Dox said:

The smart money is increasingly on not taking the maximum tax free cash unless there is an obvious use for it.

Its interesting this, a lot have said this to me too. But then 2/3 years later they regret it because they are paying huge tax on the income become the state pension kicks in on top of suddenly realising they would like to donate some money to family and/or then have an illness

I would agree with this.  If my DH had not taken the lump sum on his DB pension then he would fall into the higher tax bracket once his state pension kicks in and anything he takes  out of his DC pot would then be taxed at the higher rate. Having an investment and savings buffer means if needed we could help our children, fund a round the world holiday or buy a  new car with cash. Surely people look to avoid paying tax on their pension wherever possible?

Personally speaking I would rather be a HR taxpayer than a BR or non-taxpayer if the amouint of tax paid is representative of the assets owned / income or pension amount. >£50k per year sounds better than <£12.5k to me.

I agree making sensible decisions around when and what sources of funds to access to minimise tax paid ios sensible but that doesn't necessarily mean taking the largest lump sum possible in every case.

I'm in the LGPS and I think it's a 1:12 commutation factor, I won't have a mortgage to pay off and have access to other funds for any lump sum purchases or helping kids out.

Why would I sacrifice CPI linked income for life (the majority of which will be taxable once SP kicks in) for a lump sum that I have no need for? It won't take many years for the after-tax amount on the higher pension to overtake the lump sum so I would be "volunteering" to pay more tax but anticipate being better off as a result. 

ProDave

My plan is to draw the PCLS monthly at a rate that it runs out just as the state pension starts to pay.

That is also my plan for a small DC pension fund now in a SIPP