Extra tax free cash lump sum - too good to miss?

Mark__H

My wife took voluntary redundancy a few years back.

Under the terms of the VR she is able to draw her final salary /defined benefit pension at age 55 (instead of 60) without any reduction.

She also has an AVC fund of circa £90k

She’s now approaching 55 and has just received a ‘pack’ with her pension options.

Her mindset was always to take the separate AVC fund as tax free cash and leave the DB scheme intact, which would mean an annual pension of £20600.

In addition to the £90k from the AVC fund, the pension pack allows for the payment of a further  tax free cash sum of £37k from the DB scheme (i.e. to represent 25% of the total DB/AVC pension pot), but to take this would mean a revised DB annual pension of £19300.

So, she’d lose £1300pa from her pension, which in reality is only £1040 after tax.

Therefore she's effectively getting £37k up front at the sacrifice of an extra £1k per annum pension.

I know the life expectancy stats say she’s got many years of pension income ahead of her and that if the £37k is left in the scheme then it will hopefully keep up with inflation, but the multiplier of 37x seems generous.

We will have no debt and adequate savings, so the extra £37k will only find it’s way into a miserly interest paying savings account but nevertheless the thought of the taking the extra £37k is looking attractive.

Any thoughts?          

JoeCrystal

Is there an option of buying more pensions from the scheme itself with AVCs itself as well? Especially if she has no plan for an AVC fund apart from putting it into a cash-saving account?

Mark__H

JoeCrystal said:

Is there an option of buying more pensions from the scheme itself with AVCs itself as well? Especially if she has no plan for an AVC fund apart from putting it into a cash-saving account?

It's a valid question Joe. There is that option but we have plans for the tax free AVC cash, so it's just whether to take the extra £37k lump sum that we're struggling to decide about.   

Albermarle

so the extra £37k will only find it’s way into a miserly interest paying savings account 

If you have no short or medium term need for the money , you should consider investing it in a Stocks and shares ISA ( if you take it of course )

At least that way its value should at least keep pace with inflation in the long term, and hopefully better than that

jamesd

Paying both parts of tax free money into a pension first looks like a better idea. Assuming 4there's enough pay to do it.

MK62

jamesd said:

Paying both parts of tax free money into a pension first looks like a better idea. Assuming 4there's enough pay to do it.

......though you might need to be careful not to get caught up in HMRC's PCLS recycling rules.

MK62

As to the money itself....tough choice really, as it's right around the 50:50 mark  (as in the chances of doing better taking the lump sum)........in reality, nobody can say today which would be the better option, there's simply no way to know, and no real way to load a guess (as it's around 50:50 either way).

In your shoes, if I didn't need the money, I probably wouldn't take the risk tbh......I don't think the odds are sufficiently in your favour to make the risk worthwhile, but that's just my take on it.....

Mutton_Geoff

Similar decision here. I had the option to commute some of my DB pension to top up my TFC to the max available but at a cost of 1/20th. Since I'll be a high rate tax payer in retirement, that works out to 33 years to "break even" excluding the inflation linked element of the DB scheme. I decided I'd like to have the money now and enjoy it in the early years of retirement and am in the process of ordering a new [insert sporty German marque] with the proceeds.

MK62

Mutton_Geoff said:

I decided I'd like to have the money now and enjoy it in the early years of retirement and am in the process of ordering a new [insert sporty German marque] with the proceeds.

Not sure anyone could call that a bad plan......

Brynsam

Mark__H said:

In addition to the £90k from the AVC fund, the pension pack allows for the payment of a further  tax free cash sum of £37k from the DB scheme (i.e. to represent 25% of the total DB/AVC pension pot), but to take this would mean a revised DB annual pension of £19300.

So, she’d lose £1300pa from her pension, which in reality is only £1040 after tax.

Therefore she's effectively getting £37k up front at the sacrifice of an extra £1k per annum pension.

I know the life expectancy stats say she’s got many years of pension income ahead of her and that if the £37k is left in the scheme then it will hopefully keep up with inflation, but the multiplier of 37x seems generous.

Too generous! DB schemes don't have tax free cash based on 25% of the pot - that is purely a DC concept. DB schemes have tax free cash based on the rules of an individual scheme.

Are you sure the £37,000 tax free cash doesn't mean a reduction of £1300 in the starting level of her DB pension AND a 'hit' of £22,500 on her AVC pot?

hyubh

Brynsam said:

DB schemes don't have tax free cash based on 25% of the pot - that is purely a DC concept. DB schemes have tax free cash based on the rules of an individual scheme.

The equivalent limit is 25% the LTA input, i.e. 25% a standardised notional pot value (this includes the lump sum taken itself). DB schemes aren't free to specify a tax free amount that is as broad as the member might wish.