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

Mark__H · 5 January 2021 at 4:14PM

Brynsam said:

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?

Obviously on a gross basis, the multiplier is more like 28x (£37000/£1300), so I don't know whether this changes your "too generous" perception here? I'm a relative novice so not sure whether the calculation would normally be worked net or gross.

Turning to your other question - her scheme rules are that for tax free cash lump sums, the AVC funds are used first. So she could not access the extra £37k without having also exhausted the £90k in her AVC pot.

Brynsam · 5 January 2021 at 4:18PM

hyubh said:

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.

You're right, of course. In practice DB rules always contain a provision limiting the amount of tax free cash, if only along the lines of 'subject to HMRC limits'. Probably would have been helpful to add that to stop anyone fondly believing it could be any old amount!

Mark__H · 6 January 2021 at 11:35AM

MK62 said:

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.....

Sorry MK62, I didn't spot this reply yesterday. Yes, 50/50 seems exactly right. In fact we're getting sore backsides from sitting on the fence trying to make a decision here. I can see a coin toss on our horizon.