25% Tax Free across DC and DB pension?

JamesP8

Retiring aged 55 with DC pot going into drawdown, crystallising roughly 40% of LTA and taking 25% of crystallised amount tax free. Plan is to hopefully maintain enough remaining LTA to absorb projected DB pension (20x) when taken at age 60. When DC pot and projected DB are combined, the current LTA is materially exceeded and plan is to monitor the potential of taking the DB early to potentially reduce its future LTA contribution. My question relates to the 25% tax free opportunity. Assuming LTA tax free limit of circa. £ 268k at age 60 and having previously taken circa. £100k at drawdown, how would the remaining circa. £ 168k tax free be handled within the future DB pension please?

Brynsam

JamesP8 said:

Retiring aged 55 with DC pot going into drawdown, crystallising roughly 40% of LTA and taking 25% of crystallised amount tax free. Plan is to hopefully maintain enough remaining LTA to absorb projected DB pension (20x) when taken at age 60. When DC pot and projected DB are combined, the current LTA is materially exceeded and plan is to monitor the potential of taking the DB early to potentially reduce its future LTA contribution. My question relates to the 25% tax free opportunity. Assuming LTA tax free limit of circa. £ 268k at age 60 and having previously taken circa. £100k at drawdown, how would the remaining circa. £ 168k tax free be handled within the future DB pension please?

The DB scheme will have its own rules stipulating how much tax free cash you can take - unlike DC arrangements, it isn't 25%. You'd need to ask the scheme's administrators for more information.

hugheskevi

JamesP8 said:

Assuming LTA tax free limit of circa. £ 268k at age 60 and having previously taken circa. £100k at drawdown, how would the remaining circa. £ 168k tax free be handled within the future DB pension please?

The crystallisation of DC uses 40% of available LTA, leaving 60% for the DB crystallisation.

You can only take up to 25% of available LTA as tax-free, so in this case it would be 25% of 60%, which is 15% of LTA at time of crystallisation. As Brynsam says above, scheme rules will determine how the tax free amount is calculated within the scheme, and the scheme advisor can inform you of the calculation methodology and limit.

Note that for LTA purposes a tax-free lump sum always crystaliises immediately before the associated income, so if you breach the LTA it will be with DB income based on what you say above.

JamesP8

hugheskevi said:

JamesP8 said:

Assuming LTA tax free limit of circa. £ 268k at age 60 and having previously taken circa. £100k at drawdown, how would the remaining circa. £ 168k tax free be handled within the future DB pension please?

The crystallisation of DC uses 40% of available LTA, leaving 60% for the DB crystallisation.

You can only take up to 25% of available LTA as tax-free, so in this case it would be 25% of 60%, which is 15% of LTA at time of crystallisation. As Brynsam says above, scheme rules will determine how the tax free amount is calculated within the scheme, and the scheme advisor can inform you of the calculation methodology and limit.

Note that for LTA purposes a tax-free lump sum always crystaliises immediately before the associated income, so if you breach the LTA it will be with DB income based on what you say above.

Thanks for your input. Hopefully, the crystallised part of the DC plus the DB projection (when taken) should be around the LTA limit. Additional concern which I have is that the currently uncrystallised part of the DC will take the position well above the LTA. Considering options as to how to manage this, as presume it's inaccessible until also moved to drawdown and crystallised at some point, incurring an additional tax charge.

Albermarle

Not sure there is a lot you can do . In any case not such a bad problem to have Maybe keep the uncrystallised part in low returning safer investments . Not much point gunning for growth if you lose most of it in LTA tax.

JamesP8

Another element to this question is if I decided not to take the tax free cash offered at the start of receiving the defined benefit, final salary pension, how would the remaining balance of the the tax free amount (25% of the remaining 60% of LTA) be handled please? Would any received annual pension be paid 25% tax free until the overall tax free limit of the LTA has been reached? Many thanks.

Silvertabby

JamesP8 said:

Another element to this question is if I decided not to take the tax free cash offered at the start of receiving the defined benefit, final salary pension, how would the remaining balance of the the tax free amount (25% of the remaining 60% of LTA) be handled please? Would any received annual pension be paid 25% tax free until the overall tax free limit of the LTA has been reached? Many thanks.

No.  There is no automatic 25% tax free element with a  DB pension - that is just the maximum you can commute (if indeed the scheme allows commutation).  It's a one-off offer - going forward your annual/monthly pension will all be classed as taxable income. 

JamesP8

Many thanks for your reply. My DB scheme offers a tax free lump sum (commutation) and a reduced annual pension, but at the moment I don't anticipate taking the tax free option when I take the pension. So just thinking further on this, it seems that if I were to move additional funds to drawdown from the remaining SIPP balance and therefore crystallise more of the LTA, as opposed to maintaining the balance of the LTA for the future final salary pension (with no tax free amount taken), this could have a tax advantage?  By this I mean that 25% of only the Drawdown value would be tax free, but all of the DB pension payments would be taxable? Thanks.