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

drummersdale

Just a quick question - my pension is Civil Service Classic - my lump sum should be around £75k in 2022 when I am looking to retire (unless I take additional amount on top but that's a moot point) - when people say it's tax free - do they really mean tax free as in if I open my bank account I would see the £75k or will the Treasury simply get their tax cut through some other nefarious means?

jimi_man

Assuming it's no more than 25% of your pension, then yes, that's what you would see in your bank account. 

swindiff

AnotherJoe said:

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.

I did account for the tax, it's the figure in brackets

drummersdale

jimi_man said:

Assuming it's no more than 25% of your pension, then yes, that's what you would see in your bank account. 

Does that assume I’ll get £225,000 over the remainder of my retirement - obviously across a number of years? What’s the significance of the 25% if you don’t mind me asking.

AlanP_2

drummersdale said:

jimi_man said:

Assuming it's no more than 25% of your pension, then yes, that's what you would see in your bank account. 

Does that assume I’ll get £225,000 over the remainder of my retirement - obviously across a number of years? What’s the significance of the 25% if you don’t mind me asking.

No, your tax free lump sum will be whatever your scheme offers which sounds like £75k from what you said. The 25% is an HMRC limit on the value of tax free lump sum.

In your case, as it a defined benefit scheme, that limit is ((20 * Annual Pension) + Lump Sum)/4. Your retirement quote will likely show the maximum lump sum you could get if you commuted some annual pension for a larger lump sum and that maximun will be as per the formula shown.

drummersdale

AlanP_2 said:

drummersdale said:

jimi_man said:

Assuming it's no more than 25% of your pension, then yes, that's what you would see in your bank account. 

Does that assume I’ll get £225,000 over the remainder of my retirement - obviously across a number of years? What’s the significance of the 25% if you don’t mind me asking.

No, your tax free lump sum will be whatever your scheme offers which sounds like £75k from what you said. The 25% is an HMRC limit on the value of tax free lump sum.

In your case, as it a defined benefit scheme, that limit is ((20 * Annual Pension) + Lump Sum)/4. Your retirement quote will likely show the maximum lump sum you could get if you commuted some annual pension for a larger lump sum and that maximun will be as per the formula shown.

Thanks Alan - much appreciated - by my basic calculations the maximum (using the formula you kindly provided) would be c£143k - chance would be a fine thing!
Kind Regards

Mutton_Geoff

garmeg said:

its only 55% for a 40% taxpayer.
For a 20% taxpayer it is 40% (and 25% for a non taxpayer).

Just to point out for the benefit of others, there isn't a variable tax rate for the exceedance of LTA, for income, it's always 25% taken off first then you are taxed at your marginal rate, ie

£100 less 25% LTA tax leaves £75. Taxed at 20% leaves £60 (effective rate 40%), £75 taxed at 40% leaves £45 (effective rate 55%).

garmeg said:

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!

Yep, as mentioned 2% NI for the 2-3 years I have remaining at work.

ttree30

I paid off our mortgage and have kept the rest as savings to provide a cash reserve - this is also helping to give the main pension pot more time to recover and grow post-CoVID, though I took mine before we knew about the virus so that’s serendipity,

As other posters said it’s best to have a purpose or purposes; otherwise probably best to leave it alone unless there’s a risk of unfavourable tax reforms.

clive0510

I'm 59. I intend to take a lump sum from my private pension between now and when I retire and hopefully spend the money  on having this place painted and decorated through out. also new carpets and curtians. got some draughty floor boards so get those fixed. so then I got a nice home for my retirement. thats the plan I have in mind.

arnoldy

Many people don’t realise that most (private sector) DB pensions are NOT inflation proof. Most schemes have parts that either have 0% rises, 2.5% capped, or 4.5% capped.

At the moment this is not a huge issue, but there is increasing speculation about an uptick in inflation post Covid.

For a typical pension 10 – 11 years of 5% inflation would wipe nearly a quarter off the real value of the pension (assuming on average its capped at 2.5%).

Many people take the lump sum to invest in ISAs as a strategy to mitigate inflation, the theory being the lump investment growth will be more than inflation.

Of course having a DB pension means you don’t need to hold as much cash, and I believe public sector pensions are fully inflation linked whatever inflation is.