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

TBC15

IAMIAM said:

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. 

I took my 25% out a couple of years ago when I transferred my DB to a SIPP. I wish I’d thought it through a bit more as that 25% could have been growing tax free in the pension. Now it’s part of my investments that hinder the annual CGT churn.

cfw1994

TBC15 said:

IAMIAM said:

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. 

I took my 25% out a couple of years ago when I transferred my DB to a SIPP. I wish I’d thought it through a bit more as that 25% could have been growing tax free in the pension. Now it’s part of my investments that hinder the annual CGT churn.

A good reason to stuff them into ISA funds.....tax free!
Obviously limits to that, but a couple can get £80k away either side of April to help there.....
A motor home does sound a decent use of some funds too......hmmm....!

AnotherJoe

cfw1994 said:

IAMIAM said:

Just curious, what do people actually do with their lump sum when retired at age 55+, a few of my friends have said they will use it to buy house in cash after 30 years of renting! Wondered what people tend to do with it.....saving it seems pointless 

Well....if someone is close to the LTA, then it can perhaps make sense to crystallise it before it 'trips over'. 
That way, the "age 75" test is against the *growth* of the drawdown pot (the 75% left) - which could perhaps all be taken down before then.
I have crystallised a chunk of mine - some to pay mortgage (fiscally not the smartest move, but mentally very sound!), some to fill ISAs for self+partner either side of April.   Some to stack into premium bonds ready for drawing on in the future.
At the end of the day, if you are re-investing some/most/all, the actual investments could remain the same: the pension is, of course, just a tax efficient wrapper, as are the ISAs. 

That's a good point and the reason I took the full 25% (over time diverted into ISAs) and I'm now in danger of bumping up against the LTA again and may start taking more than the allowance out and paying the 20% tax to avoid 55% later. It's a nuanced decision since the 55% is only on the excess and since that's ten years away so maybe some of my investments will fall into a black hole and I won't have that as an issue. 

I suppose I'll have to start looking at exactly how it works and spin up a spreadsheet. But in essence i think is as simple as, keep below the LTA by paying 20% now on the amount it would be above, rather than 55% later. 

Mutton_Geoff

I'm deliberating this at the moment and it's the subject of another thread I started.

I took 90% of my 25% from a DB>SIPP transfer and used the money for property development. I then sold that property and as it was my principal residence, the gains were (mostly) tax free so I was able to lever the cash.

Now I'm considering what to do about the remaining 10% (£31k of my £1.25m LTA) since this will have to be commuted from a DB scheme. Since most of my LTA has been used up and I'll be a high rate tax payer for at least the first decade of retirement, then most DB income will be taxed at 55% (25% LTA exceedance and 40% income, plus 2% NI for the next 2-3 years til retirement) so the 57% tax avoidance makes drawing it it look attractive.

swindiff

I plan on taking the maximum lump sum from my pension at 60, I have a hybrid pension, part DC and part DB.  Looking at projections my maximum lump sum should be around £144k.  This would buy me an extra £3,359/year in pension (£2,687 after tax).  Assuming the pension increased by 3% a year I would be 92 before I broke even.  Seems a no brainer to me to take the maximum lump sum?
I intend to use mine to give me an extra £20k per year pension for 7 years until state pension age.  Will probably stick the majority of it in ISA's (Cash and cautious S&S)  for my wife an myself until we actually need it.

garmeg

AnotherJoe said:

cfw1994 said:

IAMIAM said:

Just curious, what do people actually do with their lump sum when retired at age 55+, a few of my friends have said they will use it to buy house in cash after 30 years of renting! Wondered what people tend to do with it.....saving it seems pointless 

Well....if someone is close to the LTA, then it can perhaps make sense to crystallise it before it 'trips over'. 
That way, the "age 75" test is against the *growth* of the drawdown pot (the 75% left) - which could perhaps all be taken down before then.
I have crystallised a chunk of mine - some to pay mortgage (fiscally not the smartest move, but mentally very sound!), some to fill ISAs for self+partner either side of April.   Some to stack into premium bonds ready for drawing on in the future.
At the end of the day, if you are re-investing some/most/all, the actual investments could remain the same: the pension is, of course, just a tax efficient wrapper, as are the ISAs. 

That's a good point and the reason I took the full 25% (over time diverted into ISAs) and I'm now in danger of bumping up against the LTA again and may start taking more than the allowance out and paying the 20% tax to avoid 55% later. It's a nuanced decision since the 55% is only on the excess and since that's ten years away so maybe some of my investments will fall into a black hole and I won't have that as an issue. 

I suppose I'll have to start looking at exactly how it works and spin up a spreadsheet. But in essence i think is as simple as, keep below the LTA by paying 20% now on the amount it would be above, rather than 55% later. 

its only 55% for a 40% taxpayer.

For a 20% taxpayer it is 40% (and 25% for a non taxpayer).

garmeg

Mutton_Geoff said:

I'm deliberating this at the moment and it's the subject of another thread I started.

I took 90% of my 25% from a DB>SIPP transfer and used the money for property development. I then sold that property and as it was my principal residence, the gains were (mostly) tax free so I was able to lever the cash.

Now I'm considering what to do about the remaining 10% (£31k of my £1.25m LTA) since this will have to be commuted from a DB scheme. Since most of my LTA has been used up and I'll be a high rate tax payer for at least the first decade of retirement, then most DB income will be taxed at 55% (25% LTA exceedance and 40% income, plus 2% NI for the next 2-3 years til retirement) so the 57% tax avoidance makes drawing it it look attractive.

No NI is applied on pension income ... yet!

AnotherJoe

swindiff said:

I plan on taking the maximum lump sum from my pension at 60, I have a hybrid pension, part DC and part DB.  Looking at projections my maximum lump sum should be around £144k.  This would buy me an extra £3,359/year in pension (£2,687 after tax).  Assuming the pension increased by 3% a year I would be 92 before I broke even.  Seems a no brainer to me to take the maximum lump sum?

I would say so, similar calc for me was age 99 ! Don't forget to account for the tax you'll pay on the extra pension as well when doing the calculation. That makes it an even longer payback if you hadn't allowed for that.

swindiff said:

I intend to use mine to give me an extra £20k per year pension for 7 years until state pension age.  Will probably stick the majority of it in ISA's (Cash and cautious S&S)  for my wife an myself until we actually need it.

Pretty much what i did with my TFLS, then with the DB that i could have a lump sum with (and as said, taking the max was a no-brainer) I'm just going to spend it / give it to the kids.

AnotherJoe

garmeg said:

AnotherJoe said:

cfw1994 said:

IAMIAM said:

Just curious, what do people actually do with their lump sum when retired at age 55+, a few of my friends have said they will use it to buy house in cash after 30 years of renting! Wondered what people tend to do with it.....saving it seems pointless 

Well....if someone is close to the LTA, then it can perhaps make sense to crystallise it before it 'trips over'. 
That way, the "age 75" test is against the *growth* of the drawdown pot (the 75% left) - which could perhaps all be taken down before then.
I have crystallised a chunk of mine - some to pay mortgage (fiscally not the smartest move, but mentally very sound!), some to fill ISAs for self+partner either side of April.   Some to stack into premium bonds ready for drawing on in the future.
At the end of the day, if you are re-investing some/most/all, the actual investments could remain the same: the pension is, of course, just a tax efficient wrapper, as are the ISAs. 

That's a good point and the reason I took the full 25% (over time diverted into ISAs) and I'm now in danger of bumping up against the LTA again and may start taking more than the allowance out and paying the 20% tax to avoid 55% later. It's a nuanced decision since the 55% is only on the excess and since that's ten years away so maybe some of my investments will fall into a black hole and I won't have that as an issue. 

I suppose I'll have to start looking at exactly how it works and spin up a spreadsheet. But in essence i think is as simple as, keep below the LTA by paying 20% now on the amount it would be above, rather than 55% later. 

its only 55% for a 40% taxpayer.

For a 20% taxpayer it is 40% (and 25% for a non taxpayer).

Thanks. I obviously need to look into this in detail now, I've read 55% so many times I've just assumed thats what it is.

garmeg

AnotherJoe said:

garmeg said:

AnotherJoe said:

cfw1994 said:

IAMIAM said:

Just curious, what do people actually do with their lump sum when retired at age 55+, a few of my friends have said they will use it to buy house in cash after 30 years of renting! Wondered what people tend to do with it.....saving it seems pointless 

Well....if someone is close to the LTA, then it can perhaps make sense to crystallise it before it 'trips over'. 
That way, the "age 75" test is against the *growth* of the drawdown pot (the 75% left) - which could perhaps all be taken down before then.
I have crystallised a chunk of mine - some to pay mortgage (fiscally not the smartest move, but mentally very sound!), some to fill ISAs for self+partner either side of April.   Some to stack into premium bonds ready for drawing on in the future.
At the end of the day, if you are re-investing some/most/all, the actual investments could remain the same: the pension is, of course, just a tax efficient wrapper, as are the ISAs. 

That's a good point and the reason I took the full 25% (over time diverted into ISAs) and I'm now in danger of bumping up against the LTA again and may start taking more than the allowance out and paying the 20% tax to avoid 55% later. It's a nuanced decision since the 55% is only on the excess and since that's ten years away so maybe some of my investments will fall into a black hole and I won't have that as an issue. 

I suppose I'll have to start looking at exactly how it works and spin up a spreadsheet. But in essence i think is as simple as, keep below the LTA by paying 20% now on the amount it would be above, rather than 55% later. 

its only 55% for a 40% taxpayer.

For a 20% taxpayer it is 40% (and 25% for a non taxpayer).

Thanks. I obviously need to look into this in detail now, I've read 55% so many times I've just assumed thats what it is.

Think of the LTA charge as the Government getting the PCLS instead of you!