Taking out a lump some from my old DB pension

tempus_fugit

frankraz said:

Yes that is what they said. My question is as I cashed my DC pension in the last financial year which included the 25% tax free entitlement would i still qualify for tax free now?

The short answer is yes.

frankraz

Thank you so much for you help with this everyone. Much appreciated

Secret2ndAccount

Wow, why can't you guys give Frank the one simple piece of reassurance in plain English that he is asking for.

Yes Frank, each pension has its own separate tax free lump sum. Just because you've taken a tax free lump sum from one pension, doesn't stop you from taking a lump sum from another pension, also tax free. Same year or different year - doesn't matter.

An example. I have three pensions, a SIPP I've saved up myself, a DC pension from my job, and an old DB pension from a previous job. I can take 25% of the money out of my SIPP tax free. Once I do that, the other 75% in the pot becomes 'crystalised', so everything I take out of the SIPP after that will be subject to tax as if I had earned it as salary. If I leave that money in the SIPP for several years, or take it bit by bit, that pot will hopefully grow. But it's crystalised. I never get any more of it tax free.

I can also take a lump sum, tax free, from the DC  pension. With most schemes, you are not forced to take the full 25% all at once. I could choose to crystallise just half my pot - I take 12.5% of the pot tax free cash, and leave the rest in. Now, if the pot grows, the crystallised part will all be subject to tax on withdrawal, but half the pot hasn't been crystallised yet, so I could still take 25% of just that part tax free at any time.

With the DB pension it's slightly different. The reason is I don't have my own pot of money. They agree to pay me a pension, and there's a set of rules for how it's worked out, but all the money comes out of one giant pot, shared with all the other employees. So there's no personal pot to get 25% of. Instead, they have a rule for calculating a tax free lump sum. It's different for each scheme, so you need to find out your figure. Still tax free though, whenever you take it. Often with DB schemes they will only give you the tax free lump sum if you start taking the pension. Usually the DC people will be far more flexible, but it would be wise to check if they have any rules limiting how you take your money.

Hope this helps.

frankraz

Dear Secreet2ndAccountant
Thank you so much for this. It is really clear now and a great help. Just one last question, if I take the lump sum out of my DB and rest to be paid out monthly, would this have an implication on my current contributions to my current DB pension , I.e the tax relief on how much I can contribute on yearly basis. I know in DC pension if I withdraw  anything over 10k will result in tax being occurred on my contribution allowance which I belive is about 4k I.e I have to pay tax on anything I contribute over 4k. Is this the case on DB as I am currently contributing 8% of my  pension in my current employer. 

Secret2ndAccount

You will be okay to keep paying into the DB.

As you've already cashed in a 28k DC pension, you have already triggered the MPAA. That means you can only get tax relief on 4k of contributions to DC pensions each year. But you can keep contributing to DB pensions - the MPAA doesn't affect them.

frankraz

Thanks Secret2nd Account this is really helpful. WOuld this effect if I cash the old DB pension, i.e. would I lose the tax relief on my contribution to m existing DB pension

Secret2ndAccount

You can cash in one DB and still get tax relief for payments into another. There are rules against recycling. These are there to stop people paying money into a pension (getting tax relief), taking it out and paying it in again (getting more tax relief). If you just continue to make your regular payments into your pension, then cashing in a different one is allowed, and isn't going to trigger the recycling rules. If you were to cash in the old DB then make a large lump sum payment two weeks later into your current DB, that might be a different matter.

I don't know your circumstances or the size of the sums involved, but cashing in a DB is normally a bad idea. A DB pension is one of the most reliable sources of income over a long period. It goes up with inflation. It never runs out. Cashing it in should really be a last resort. The offer they put in front of you to get you to cash in might have your eyes out on stalks, but you really should take a minute to think about how much money it might pay if you left it in. Think about a reliable monthly payment that goes up every year in line with inflation, and will still be there if you live to be 105.

If you want to cash in a DB worth over 30k you are legally required to take financial advice, and that will be expensive.

xylophone

 WOuld this effect if I cash the old DB pension, i

What exactly do you mean by this?

You would seek to transfer the DB pension to a DC scheme and having done so, would take the tax free 25%  Pension Commencement Lump Sum and the balance as a taxable lump sum?